A little more than a year ago, I wrote an article about whether or not to invest our babies' money. The advice was overwhelming. Since they aren't going to use this money (mostly birthday cash from relatives/friends) for quite some time, it should be invested on their behalf.
Look at all this money!
Unfortunately, I lived down to my Lazy name. I didn't invest the money. On the bright side, they probably haven't lost any money as I would have split it between domestic and foreign stocks. The domestic portion would have done well and the foreign, not so well.
It's time to fix that. I'd like to set-up a brokerage account for them. Even a year later, at ages 1 and 2 they won't be needing the money for years. I called up USAA with a very simple plan: open up a brokerage account in each of their names, transfer their money into, buy an ETF, and watch it grow over the years.
Since they are under the age of 18, I can't open an account in their name. That makes legal sense, but I didn't anticipate it. It appears that there are two options:
Open two brokerage accounts in my name. In this case I'd manage them as if they were my own.
Open a UGMA/UTMA account for each of them. In this case, there's some special tax treatment that I'd have to understand.
So let's look at the two:
Brokerage Accounts in my Name
It doesn't feel right to have the money in my name. It's their money.
From a financial perspective, this money should be taxed at their income levels... which would be significantly less than mine even in the future.
1. When it comes time to calculate financial aid, it's going to show up as their money.
2. The children receive the money at age 18 or 21 (depending on the state).
I don't have a problem with either of these. The money should show up as theirs when it comes to financial aid. I don't care if they spend it before the age of 18 or 21. In fact, I'm hopeful it will grow to be enough to buy a car at age 16. Then they can say, "Hey, good job investing my money when I was 2, Dad!" (I won't hold my breath on that one.)
What I have a problem with is that a significant portion could be taxed at the parents' marginal tax rate. Reading this this tax codes makes my head explode. As I understand it, this was prevent a loophole where parents were using this to shelter their money.
I don't think money that was gifted to them by friends and relatives should be subject to our tax rate, but it seems like it is.
So What Should I do?
I don't know if this is an answer to my own question, but I'm thinking that this whole issue may be a moot point. I intend to buy an ETF in the brokerage and hold it for a long, long time. I think that would qualify it as a long-term capital gain and not subject to marginal tax rates.
It makes me think that I should just open the brokerage account in my name and manage it myself. Just to be sure a call to my tax advisor may be of help.
In case you were wondering, I'm thinking of buying Vanguard Total World (VT) as my one stock for them. The reason is that this provides great growth potential and diversity (in a domestic and foreign sense) with minimal risk (due to the long-term outlook). Also, since they don't have a lot of money to invest, I want to keep the brokerage commissions at a minimum (a $10 commission is 1% of a $1000 balance). That rules out buying a portfolio of stocks.
So what do you think? Let me know in the comments below.
A few weeks ago, I wrote an article about whether I should invest my babies' money. I think the general consensus was that I should, especially because I'll personally make up for any losses. (Don't you wish all investing companies were as cool as me?)
So the question then becomes, where do I invest the $1000? Ideally, I'd keep the expense ratio as low as possible and still have a diversified fund. If it were more money, I'd open up a brokerage account and buy Vanguard's Total Market Index. However, for less than $1000, the commission to buy would be around 1%. I suppose that isn't the worst thing in the world. At least it would be a one-time fee. After that, it would be Vanguard's typical low commissions.
Alternatively, it appears as if I could open up an account at Vanguard itself and buy a mutual fund perhaps avoiding the commissions.
I'm probably over-thinking the commission. While 1% seems like a lot, in reality it is $10, which is pretty tiny, right? Perhaps not. He may get $100 to $200 on a birthday or something, which means that money would have to go to a savings account unless I want to pay a 5-10% fee via commission to buy more shares. That mutual fund is looking better and better.
Mutual funds just seem weird to me as I haven't invested in them in probably more than 15 years (outside of a 401K).
Another idea is to go with Lending Club. As I was writing about yesterday, it occurred that me that it could be a good fit. The only problem is that I'm not sure my wife would be on-board with such an unusual idea. Maybe I can convince her with the humorous concept that a two year old would be lending money to a bunch of adults with financial problems.
Even if I could convince here, I'm not sure that Lending Club will let a two year old open an account. It does look like there's a custodial account. I'll be the first to admit that I don't know much about Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) types of accounts. However, these don't seem to be a fit, since the money is owned by the children, it isn't a gift from me to them.
I know I'm all over the map with this topic. That's why it is perfect for an "Ask the Readers" article. Got any advice to point me in the right direction?
The article is filled with a lot of eye-opening expenses. For example, the article says, "elite players can easily spend $30,000 a year..." and breaks it down: travel ($15K), group training ($7K), private lessons ($5K), court fees ($2K), and equipment ($1K).
While it may sound like a ton of money, such costs of elite training is nothing new. Olympic athletes and violinist prodigies have similar costs. In fact, the comments on a previous article covered this.
Where the article tends to get a little weird for me is when it brings up the return of investment (ROI). It suggests that the parents are pinning their hopes on an athletic scholarship. Then it throws a bucket of water over those hopes by saying, "In 2011-2012, only 0.8% of undergrads won any kind of athletic scholarship."
Can you tell me what's wrong with this logic?
I'm guessing many of you caught it, but I'll spell it out anyway. The $30,000 a year costs that are being racked are by "elite players." Can you guess the talent level of the 0.8% of undergrads earning athletic scholarships? If you said, "elite players" we are totally in sync right now.
It would be very interesting to know what percentage of people are spending $30,000 and NOT getting scholarships. While it is very unlikely, perhaps each and every one DID get a scholarship. From the data that's presented, we simply don't know.
It isn't necessarily likely to be a loss and the odds aren't as bad as presented. The presented odds of 99.2% who don't get athletic scholarships include oafs like me.
I'm not going to make a case that it is wise to spend $30,000 a year for tennis training. I'm not going to say that it is a terrible move either. I'm going to say that it isn't wise to presume that there's going to be a return on investment... especially when there is an an uncertainty of receiving a scholarship... and that it might be worth less than years of all that tennis training.
Perhaps most importantly, the financial component is just one factor when it comes to nurturing your child's talents. I think most would say that it is a minimal one.
I was reading My Journey to Millions last week and the topic of children accounts came up. Currently the kids, ages 21 months and 6 months, have savings accounts for money that was gifted by family and friends. It isn't a ton of money, but it adds up.
Obviously, it made sense to get them a savings account, which we did. That's where the money has sat since. The inflation monster nibbles away at it each day.
I think the question is obvious, should I invest this money for them? The people giving the money didn't give it with instructions. The kids themselves are too young to express their own wishes... or even understand the concept of money.
That leaves the decision up to me, right? It's a difficult thing investing money for other people. I obviously don't want to lose their money. It still seems like the right thing to do. The kids have no immediate need for the money and won't for a few years. This gives it some good time to grow.
The question becomes how to invest the money. Evan covers this in depth and settled on a blend of 70% stocks and 30% bonds. I like this idea a lot. The only downside that I can think of is that it isn't a lot of money, so I have to keep commissions and other investing related expenses low. A $10 commission might not seem like a lot, but if it's on $1000, that is 1% off the top, before we factor in expense ratios.
I think I'll grant the kids downside protection just in case there is a crash that never recovers. This way there is no chance that they lose the gift. Given the time horizon, I'm hoping they'll learn how awesome daddy was to take advantage of this thing called compound interest.
I never forget when I first learned about compound interest. I think I was 6 years old. I remember thinking that there has to be a catch, "Wait my money makes money doing nothing... and that money makes more money doing nothing?"
So let me turn it around and ask the readers. Do you invest baby money or just leave it in a savings account?
"I told them there won’t be much money left because we are spending it! We have a lot of commitments. What comes in, we spend, and there isn’t much left. I certainly don’t want to leave them trust funds that are albatrosses round their necks... They have the work ethic that makes them want to succeed on their own merit."
There are lots going on here. With an estimated net worth of around $300 million dollar, what kind of commitments does he have? The interest alone is worth $9 million if it earned a paltry 3%. I don't want to tell Sting how to live his life, but that's some serious spending. He might have a problem. Furthermore to spend it all down at age 62 before his death... well that sounds a little like Brewster's Millions.
I can respect not wanting to spoil your kids so much that they can't fend for themselves. At the scale of millions it probably makes sense.
Looking at it from a personal view, though I feel differently. I am without even a single million. Yet I'm thinking about leaving money to my kids. Am I crazy? Perhaps.
My thinking is that there must be some way to structure a trust fund so that it incentivizes the kids to save money. Maybe it would look a little like a company match in a 401K. If the kids add money to a fund they can pull some extra out down the line. Perhaps the money could be structured in a trust to give them 15% annual interest rate on money deposited.
This would create a lasting legacy for Sting's future generations. Seems like a better plan than just spending it all.
As an aside, I've never really liked Sting. I thought his music is kind of girly. However, I don't mind the Police. I kind of even like them. Am I the only weird one who thinks this?
The one thing that struck me as odd is that parents are interested in having their baby be a model for the status. I wouldn't be interested in that at all. I would want Little Man to be a model because it would mean he could earn income. Why is that important? Two words: Roth IRA.
Contributing to a Roth IRA requires that you have earned income. Since Little Man's current skill set consists of dirtying diapers (which isn't in demand) and looking cute, his avenues for earning income are limited. With him only 72 or 73 years away from retirement, the clock is ticking... best to get started on that Roth IRA now.
I find the whole earned income requirement for the Roth IRA to be so annoying that I started to think of a way around it. For example, imagine a pseudo-money laundering scheme were parents pay a company for placement of the baby pictures on a website... and then the company pays the baby for modeling on the website. The company and the website itself exists only to convert the parent's earned income to earned income for the baby. That earned income can be contributed to a Roth IRA. Sneaky? Cool? Shady? What do you think?
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