News

Setting Up A Retirement Account for a Child?

Discussion in 'Other Off Topic Forum' started by 4sfed4, Jan 14, 2004.

  1. 4sfed4

    4sfed4 Karting

    Dec 22, 2003
    231
    Hello-

    Im wondering if any of you gents could offer guidance on the best way to set up a retirement account for a newborn. (My wife and I are expecting our first this coming July!)

    When one really looks at how time compunds the value of money, it becomes very apparent that if one has 55+ years to retirement, that even a modest sum and modest additions to that sum can yield substantial end results down the road. Thus, it is my goal to set something like this up for our newborn so that they have in the very least a substantial start on retirement savings.

    As far as the initial investment, I am thinking of something along the lines of $10,000 to $20,000, so it is not a vast initial sum we are talking about here. Just some basic calcs at modest return rates show that, even without any additional deposits to this initial amount, this would yield $3.5M to $7.0M at age 59.5 (when retirement accounts can generally start being withdrawn without penalty). Of course, in 59.5 years, $4M might only be worth $500 to $750k or so in todays dollars, but again, its still a very good start that can be provided with the right planning on my part.

    I have searched on the net for some guidance and really havent found much. Something like a standard or Roth IRA seems to be out as the owner of the account must have earned income in order to make contributions to such accounts.

    Anyone have any ideas on how best to handle this? I am not concerned with tax benefits, etc for me, only the best way to ensure that this account that is set up now will work out best in 59.5 years.

    Any guidance and advice would be greatly appreciated.

    Thanks-

    Larry
    Tampa Bay, FL
    2002 MB C320 Sport Wagon
    1996 Ford Ranger
    1991 Dodge Spirit R/T - 13.0@107.5 (2.12) - 13 psi - gForce tires
     
  2. To remove this ad click here.

  3. NY Joe 360

    NY Joe 360 Karting

    Nov 2, 2003
    197
    New York
    Full Name:
    Joe
    You can't contribute to an IRA/Roth IRA unless you had "wages" in that tax year, so that puts them out of the picture.

    I'd recomend putting the money in either an IRA in your name, with him/her as a beneficiary, or putting the money in a tax exempt municipal bond fund from your state. Usually earns 5% to 6% and as your child gets older he can move the money tax free into a account with better earnings potential.
     
  4. Doody

    Doody F1 Veteran

    Nov 16, 2001
    6,099
    MA USA
    Full Name:
    Mr. Doody
    fwiw, my philosophy is to make sure they can get through school (529s, etc.). after that it's their damn problem to figure out retirement.

    if they're lucky i'll kick off with some good money having gone unspent on cars (in that case, shame on me!) and they can do what they please then.

    it's nice to have money, but i always fret that it'll make the monsters soft. worrying about how to fund your retirement and how to afford your first house and all that jazz most folks do in their 20s is a really wildly educational process, imo. and it can teach you about a LOT more things than simply retirement and mortgages.

    ymmv, obviously.

    doody.
     
  5. aventino

    aventino Formula Junior

    Jun 16, 2003
    768
    Hong Kong
    Full Name:
    David L
    An interesting take that some may say makes them soft is to get together enough for a deposit for their first house. So, at age 20ish they get lumbered with a mortgage commitment, have to get in flatmates etc. and though they would rather live large and rent they get their first property under their belt freehold by about age 25-28. In spite of 10 years of *****ing about it, eventually they thank their parents. Had two friends parents do it to them and it did them (the friends) a lot of good.

    James
     
  6. 4sfed4

    4sfed4 Karting

    Dec 22, 2003
    231
    hehehehehehehe.

    We have a pre-paid tuition plan in our state which we already plan to participate in, so the school will be covered.

    Actually, I wasnt planning on telling the little one about any of this until they were older :D hehehehehehe
     
  7. To remove this ad click here.

  8. 4sfed4

    4sfed4 Karting

    Dec 22, 2003
    231
    Yeah...that struck out my first and easiest choice :(

    Thanks for that tip. Ill certainly look into that!
     
  9. benedict

    benedict Formula Junior

    Nov 6, 2003
    731
    Full Name:
    Ben
    My wife and I practice annual "gifting" religiously. Each of us gives each of our two kids $11,000 per year (once in awhile a grandparent will kick in some more as well). The gift tax exclusion was recently raised from $10,000 to $11,000. That comes out to $22,000 per year per child and
    adds up pretty quickly. If invested properly for twenty five years or so (both have S+P 500 Index funds and my personal favorite stock Altria group (formerly Philip Morris) which is up almost 90% the past year along with a nice re-invested dividend) the sky is the limit. I agree with one poster, though I wouldn't tell them about it until much later so they arent hawking me for it. LOL
     
  10. Texas Forever

    Texas Forever Four Time F1 World Champ
    Rossa Subscribed

    Apr 28, 2003
    44,807
    Texas!
    NY Joe is correct. You must have earned income to qualify for any retirement account. That said, if your child has modeling income, this will work (hint).

    If you get over the income hump, definitely go for a Roth IRA.

    From here you may wish to consider an educational IRA and/or what we call Sec. 529 plans. I'm with Doody on this one. All you owe your kids is the chance to climb up as high as possible on the diving board of life as they make their first swan dive out the door. From there, they are on their own.

    However, don't neglect investing in their education right from the git go. Both my kids have gone to private schools their entire lives. Trust me on this one, paying $10k a year tutition hurt. However, so far, it has paid off handsomely. Don't fall for this bs that kids in private school don't learn street smarts. The public schools are so out of control that it is almost criminal. Case in point. Many public school teachers sent their kids to private schools.

    Also the greatest gift that you can give you kids is your time. This quality time stuff is also bs. The only thing that counts is quantity. Teach them well and you will be amazed at what you'll learn.

    Finally, there is the uniform gift to minors act where you just set up a custodial account and you and your wife can give up to $22K a year. This also makes a great sandbox for grandparents. However, put the money in growth stocks. When my daughter was born in 1983, she got 500 shares of Exxon. Because Exxon has split three times since then, that 500 shares has now grown to 4,000 shares. I'm not saying that you should invest in Exxon. A solid mutual fund is probably a better bet. But definitely stocks over money funds for a kid.

    But what about UGTMA accounts when the minor becomes a major? Well, one of the truths in life that you will learn is that parents lie to thier kids. In this case, don't tell the kiddos anything about the UGTMA accounts. If they do find out about it, just lie and them that it is in a trust that they can't touch.

    Welcome to my world and good luck, DrTax
     
  11. tifosi

    tifosi F1 Veteran
    Lifetime Rossa

    Sep 5, 2001
    5,382
    texas
    Full Name:
    Tom D
    be careful how you set it up as I know folks who put it in the childs name and come 18/21, he took it all and blew it surfing in california. While we all think our kids will never do that you never know. Certainly put some in their names as you can have them earn income without tax up to certain levels before your rate kicks in but I like to just hold most of it in accounts under my name to be safe.
     
  12. To remove this ad click here.

  13. 4sfed4

    4sfed4 Karting

    Dec 22, 2003
    231
    Ive seen those child modeling expose shows on cable TV! LOL.


    Well, in Florida, we have a couple of plans for education. The first is the Florida Pre-Paid College plan. The other is the 529c plan, or what I call the college 401k.

    The Pre-Paid Plan info is here---
    http://www.florida529plans.com/prepaid/index.html

    Basically, you pay either a lump sum up front, payments for 55 months, or payments from when the plan is started until the child is college age (roughly 18 years in my case).

    I have been partial to the lump sum plan as I figure that it would be wise to just pay the amount up front and be done with it. (As background, I will be 32 when the newborn arrives. This will make me in my early to middle 50's during the college years. This is precisely the time I would like to at least consider retirement, thus taking care of the bulk of the college expenses way ahead of time is very appealing.) What it boils down to is about an $18k lump sum now will handle 4 years of tuition, 4 years of fees, and 2 years dormitory. (I wouldnt pre-pay all 4 years of dormitory as lord knows all of us wanted a couple of the college years in an apartment.)

    I am also thinking that setting up a 529c plan to cover other expenses such as books, maybe a little spending money, living expenses for those other 2 years out of the dorm, etc.

    The reason the pre-paid plan appeals to me is that it is also an insurance policy against inflation. Regardless of what college expenses are 18 years from now, the costs will be covered as the program is guaranteed by the state. The plan is also transferable to nearly any college in the country, although the difference in tuition would not be covered. (i.e. if the pre-paid plan was set to pay $20,000 per year to fully cover costs in the FL school, then it would also pay that same amount to any other school. So, if the child enrolls in another school which is say $30,000 per year, the plan covers $20,000 of it.)

    The flip side is that if one invested the same lump sum fully in a 529c, then one would probably earn a higher overall return. But, there is no "insurance" so to speak against rising college costs.

    SInce I dont like to gamgle with these things and like guarantees (plus considering my age when college time comes around), I am partial to the pre-paid plan as the primary funding source.

    Am I making a mistake?



    Yes...my wife is the guidance counselor at an elementary school so we are fully aware of what can happen. Where we live, the public schools are generally pretty good and we have certain "magnet" type schools as well. My wife will be "retiring" when the newborn arrives so she will be able to be at whatever school our child attends on a daily basis as a volunteer. I also have made certain career choices which have placed a priority not on $$$, but on time. So, I plan to be actively involved too!


    First off.......can you be my daddy too? LOL. 4000 shares of Exxon sure is a nice little nestegg to have at such a young age! With that amount invested at that age, her retirement should be more or less taken care of already.

    It sounds like an UGTMA account is what I need to set up. Short of the $22,000 per year that can be deposited, are there other restrictions?

    LOL!

    This is what my wifes says! She thinks that setting up too much stuff will spoil them! I say....I love to spoil! I am not wealthy, but with the right decisions can afford to do some things like this that I think will have a huge impact in the future. (Ill probably be pushing up daisies, but it might make a nice parting gift!)

    Larry
    Tampa Bay, FL
    2002 MB C320 Sport Wagon
    1996 Ford Ranger
    1991 Dodge Spirit R/T - 13.0@107.5 (2.12) - 13 psi - gForce tires
     
  14. Texas Forever

    Texas Forever Four Time F1 World Champ
    Rossa Subscribed

    Apr 28, 2003
    44,807
    Texas!
    Actually, my daughter's retirement plan is spelled "Dartmouth." :)

    Finally, if you are concerned about having too much money in an UGTMA account, the next step is a family limited partnership. But that's for another day and another lesson.

    DrTax

    ps I'd max out the contributions to the 529 plan so long as it has a good exit plan. Trying to fine tune something 18 years out is like peeing into the wind, you just get wet. I believe that the IRS will let you drop $60k into a 529 plan without triggering the gift tax rules, but be sure to read and follow all label directions before trying this at home.
     
  15. 4sfed4

    4sfed4 Karting

    Dec 22, 2003
    231
    Well, thats certainly a good retirement plan :D Those 400 shares of Exxon shoudl cover it and then some.

    That wont be a problem :D I dont anticipate having to worry about having too much money in that account :(

    Since my funds are limited (i.e. I cant afford to max out the pre-paid college plan and the 529c plan), would it be smarter to max out (as much as possible) the 529c first?

    Larry
    Tampa Bay, FL
    2002 MB C320 Sport Wagon
    1996 Ford Ranger
    1991 Dodge Spirit R/T - 13.0@107.5 (2.12) - 13 psi - gForce tires
     
  16. 4sfed4

    4sfed4 Karting

    Dec 22, 2003
    231
    Also...when looking at the 55 month and lump sum pre-paid plans, I have been trying to see which is the "smarter" way to go. From an ease standpoint, the lump sum is, well, easier. But, it appears that the 55 month plan might be smarter financially as it looks like the effective interest rate on the 55 month payment plan is very small.

    Am I calculating this correctly?

    The lump sum plan is $18,065.

    The 55 month plan would be $353.35 per month for 55 months. This totals $19,434.25.

    So, $19,434.25 / $18,065.00 = 1.076

    1.076 = (1 + r)^55

    Thus, r = 0.00133 = 0.133% per month

    The for yearly rate--

    (1+0.00133)^12 - 1 = 1.6%.

    So, the effective yearly interest rate the state is charging for the 55 month plan over the lump sum is 1.6%?

    Is that correct?
     
  17. Texas Forever

    Texas Forever Four Time F1 World Champ
    Rossa Subscribed

    Apr 28, 2003
    44,807
    Texas!
    4sfed4, I'm jaming right now trying to get caught up as I head out the door to go to the Detriot car show tomorrow. (Let's see, it's 70 degrees in Texas, and I'm leaving to go to Detroit... Not sure I should be giving any advice to anybody even if it is free..) So I will not have time to check your math.

    My point is that you are wise to maximize everything that you can right now. One investing rule that everyone should understand is the "Rule of 72." Simply put, money invested at 7.2% doubles every 10 years. Likewise, money invested at 10% doubles every 7.2 years.

    Going back to the 500 shares of Exxon I brought for my daughter when she was born. Exxon has a rep for doubling in value every 7 to 10 years and then splitting. This how 500 shares became 4000 shares in almost 21 years.

    Now buying those 500 shares definitely put a hurt on the old pocketbook 20 years ago. But once purchased, we just put it on the shelf and forgot about it.

    Same thing with a college fund. Don't over analyze the situation. The most important thing is to just do it and invest the money wisely. A 529 plan is great cause the money grows tax free. But any kind of plan is better than none. Putting in only $100 is better than none.

    Right now, time is on your side. 18 years from now, time will be your enemy.

    DrTax

    ps Pls note that I'm not a professional money manager, and I'm certaintly not recommending that you buy Exxon stock. You need to do your own homework and invest wisely. Many people compare Wall Street to Las Vegas. This is valid comparison if you are into Google IPOs. But if you are buying seed corn, it is hard to go wrong with solid blue chips like Wally World, Microsoft, Exxon, IBM and so forth and so on. In other words, those companies who are making money today are the best guess as to those who will be making money in the future. You don't need to hit it out of the park. Averaging 10% a year does just fine thank you very much.



     

Share This Page