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What Type of Investment Account Is Best for My Kids?

Written by support@seostats.com on . Posted in Education, Financial Planning, Investing, Kids, Saving.

If you’re a parent, you want the best for your children. There’s never an exception to that desire – even when it comes to the type of investment account you should use to help them secure their own financial futures.

The fact that you want to choose the optimal account type is obvious, but the best solution for you and your family isn’t. Personal finance is personal for a reason, and the right type of investment account for your kids will depend on a number of factors.

Here’s what to think about, and how to decide.

Consider the End Goal of the Account

Starting by asking “what” investment account is actually the wrong question. It’s better to ask “why” you want to open an investment account for your kids in the first place.

You need to understand your goals for the money you’ll contribute to it, and the purpose of the account. Why do you want to invest? What do you want to use the account for (or, what do you hope your kids will do with the money in the future)?

Once you get clear on this, choosing “what” – the right account – becomes much easier to accomplish. There are a few different options, but depending on your goal for the account and the funds within it can help narrow down your choices.

 

If You Want to Save for College

If your primary goal when investing money for your children is to build up a college savings fund they can use for higher education, consider the 529 plan.

This type of investment account offers tax advantages for parents looking to build college savings. So long as the funds in your 529 plan are used on qualified education expenses, the money in the account can grow tax-free.

529 plans also make it easy for other friends or family members to contribute to the education cause. Relatives or family friends can contribute directly to these accounts, and as long as they remain under the gift tax exemption limit of $15,000 per year for individuals, there are no tax consequences for the givers.

Most states offer their own 529 plans, and staying “in state” may offer additional tax breaks — but these can be small and might not be worth going with your state’s plan if the investment choices aren’t great or the fees are high. There’s no penalty or restriction on using another state’s plan.

Do, however, make sure you go direct when setting up a plan. You can learn more about why we typically recommend going direct to our clients here.

 

If You Want to Teach Them About Banking Basics

On a trip to Target when my twins were 6, I knew I had a problem. Like most kids, they begged me for a candy bar at the checkout line.

I told them, no, because we just had the money for the items on the list that we came to the store purchase. My daughter replied, “Daddy, just pull out that card you have and you can get whatever you want.”

Oh boy.

Anyone who knows me, knows I carry absolutely no cash. That’s not necessarily a problem; there are a lot of good reasons why adults would prefer to strategically use cards rather than cash for most transactions.

But kids don’t know that. And the fact that my kids never saw the physical exchange of money at a store made them completely disconnected from the value transacting between the parties.

Even adults can struggle with this concept as technology makes purchasing items easier with the swipe or click of a button. There’s an actual discomfort associated with paying and parting with tangible cash, but you don’t experience that kind of pain when you swipe a card.

If you’re interested in opening a type of investment account for your kids in order to help them learn about money in general, seek out a local bank or credit union that may offer a program to help.

My credit union, Corning Credit Union, has a program to teach kids about savings and incentivize them to do so, called CCU Supersavers. From personal experience, I can tell you my kids loved getting their “deposit pig” stamped as it got them one step closer to a prize.

If you goal is just to teach financial basics, an investment account might not be the right solution right now. A savings account at a local bank where kids can physically go to a location and handle money they saved or earned is a great way to begin teaching some fundamentals.

 

If You Want to Help Them Understand More Complex Financial Concepts, Like Investing

If, on the other hand, you have an older child or want to help your kids see how complex functions like investing work, then you can consider helping them open a joint brokerage account… but with some training wheels.

I am a big fan of Betterment, and love the platform’s low-cost, globally diversified systematic approach to investing. It’s a great way for anyone to build up assets over time, and comes with what I think of as those training wheels. You can’t do any day trading or individual stock-picking on Betterment, which can protect both kids and parents.

It’s also extremely easy to open a joint brokerage account with Betterment, in 5 minutes and with $0. This can be a good option if you want to take a more cautious approach, or strongly believe in a passive investment philosophy and want to teach your kids about “buy and hold” type strategies.

If, however, you’re looking for a more hands on or active approach, I recommend opening a joint brokerage account with a custodian like Schwab or Fidelity. Here you will have more access to investment options and greater control over your portfolio than what you’ll find at a robo-advisor that provides pre-selected portfolios based.

Once the account is open, your kids can purchase single shares of company stock. Let them pick it out but make sure they give you a reason on why they want to own the company, and then track the stock’s performance over time.

You can also consider an UGMA or UTMA if you want your child to have complete access to the funds at the age of majority in your state.

A brokerage account, with a small amount of contributions, can help provide a tangible example of how markets work, why diversification is important, what market volatility looks like, and many more important lessons that will help them be better investors as adults.

The right investment account will depend, as it always does, on the goal you want to achieve. That’s true for almost any kind of financial planning you want to do, whether for yourself or just as a means to teach your children more about money and the markets.

 

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).

 

Why Your Child’s 529 Plan Should Be Direct

Written by support@seostats.com on . Posted in Education, Kids.

The 529 State Plan as a Vehicle for College Savings

With the cost of higher education rising steadily over the past few decades, more and more families are opting to use a 529 state plan to save up the necessary funds for tuition, room, board, and textbooks. In fact, during the year 2016, these types of savings accounts contained over 275 billion dollars in assets.

And while 529 state plans are a fantastic vehicle for many people, the benefits they offer can often be eaten up by the fees that financial professionals charge for administering them. For example, upfront commissions, which typically cost investors about 4.75 percent to manage, are often in addition to the internal expenses involved with the administration of 529 accounts.

The result is that far too little of the savings goes towards the student’s actual expenses. This has led many families to pursue something called a direct sold 529 Plan, instead of the much costlier broker sold versions.

Unfortunately, from my experience, many parents aren’t aware of the differences between the direct and broker sold. They have purchased a broker sold plan without even knowing a much lower cost alternative exists.

What is 529 State Account?

A 529 account is intended to help families save for future college costs by allowing the investments to grow tax-free. They are offered in all 50 states, as well as by certain private universities.

The most popular type of 529 account is known as a college savings plan and functions in the following ways:

•             An account is set up for the student’s college expenses.

•             The money in these accounts is invested in various funds (stock, bond, and money market), usually ones chosen by the account holder.

•             Interest earned by 529 plans is not subject to federal or (usually) states taxes, as long as the funds are used for eligible college expenses.

Keep in mind that these accounts are subject to a variety of fees even beyond the commissions charged by a broker.

Broker Sold Vs. Direct 529 State Plans

Broker sold plans are purchased through a financial services firm where you will have an advisor who can walk your through various investment options. A direct-sold plan (or consumer plan) is purchased directly from the state, often via a website (such as nysaves.org).

If you aren’t sure what plan you have check out Savingforcollge.com and click on your state.

Broker sold plans will be more expensive because you will be receiving the investment guidance and management from a professional vs a direct sold where you will be picking the investments on your own.

While I believe it makes sense for most people to pay for financial advice and handholding (I’m obviously biased) in this case I don’t. The problem is with the advent of age based options you will often end up in a similar type investment regardless if you work with and advisor or not, just paying much more if you went the broker sold route. The age based option investments make it easier for the consumer to choose and invest on their own.

What Is An Age Based Option?

An age-based option is a portfolio of investments (usually mutual funds) that is automatically rebalanced from a more aggressive mix early on in a child’s life to a more conservative one as college nears. You as the investor do not need to make any changes as they are done for you as your child ages.

The age-based option can do most of what an advisor did in the past (manually) in automated fashion at a fraction of the cost.

From the nysaves.org website:

For instance, if your child is 7 years old and you choose the moderate option, you’ll start off in a portfolio with 62.5% stocks and 37.5% bonds and then transition to one with 75% bonds and 25% short-term reserves by the time he or she is ready for college.

Conclusion

Age based options via direct sold plans now make it much easier and cost efficient as you can eliminate or reduce many of the fees involved from commissions, maintenance fees, fund fees, and administrative expenses.

529 plans are designed to incentivize you to save toward higher education expenses, and they remain a good financial tool, just be wary of the many fees that can come along and hinder your growth.