Investment for a newborn

We are expecting a baby boy in August. Since we have a paid off income generating condo, me and my wife were thinking that we should re-route about 2500$ a year to little boy's account to grow overtime.I looked at 529 account ( Illinois Bright Start), Roth IRA option ( hiring my son as a model for my business, so I can issue an income check for him.) and Investment Account for mutual funds such as S&P 500 index fund from T Rowe or some other place. It would be a custodial account and the worse case scenario we are thinking to use it for a down payment for a house when this boy starts a college. My concerns about taxes and withdrawal conditions and penalties (possibly IRS due to untested Roth IRA). Any pointers?

I intend to save at least $10k per year per child for college.

ergenekon said: We are expecting a baby boy in August. Since we have a paid off income generating condo, me and my wife were thinking that we should re-route about 2500$ a year to little boy's account to grow overtime.I looked at 529 account ( Illinois Bright Start), Roth IRA option ( hiring my son as a model for my business, so I can issue an income check for him.) and Investment Account for mutual funds such as S&P 500 index fund from T Rowe or some other place. It would be a custodial account and the worse case scenario we are thinking to use it for a down payment for a house when this boy starts a college. My concerns about taxes and withdrawal conditions and penalties (possibly IRS due to untested Roth IRA). Any pointers?
I dont know specifics of the IL Bright Star plan but 529 plans are in general a good idea if you want to set aside money for your kid.
Roth option may not pass the smell test unless it is a very legitimate operation. Also, once boy turns 18, he will have complete control the Roth a/c and can use it to do whatever he likes.
If you put money in mutual funds, why a custodial a/c? Why not just in your (and spouse) name and gift it to child when appropriate. Remember that money in a custodial a/c belongs to your child; once he turns 18, he can do whatever he likes with it.

We have an IL Bright Start account for our son. I'd stay clear away. Our account today is worth less than is was (about) 5 years ago - and we have made steady monthly contributions during those 5 years. There are many, many people in the same predicament - google it.

uutxs said: Tinker2Evers2Chance said: We have an IL Bright Start account for our son. I'd stay clear away. Our account today is worth less than is was (about) 5 years ago - and we have made steady monthly contributions during those 5 years. There are many, many people in the same predicament - google it.
Are we looking at the same thing. The Performance Table indicates funds inception dates were in 7/2007 (less than 2 years ago). And yes, most equity based funds have large negative returns over that period (which is true for most equity funds over the same period); that is an investment risk you take. Is there anything else that is fundamentally wrong about this plan?

I have my kid's money in only index funds and their performance is right, ie down, but down the amount it should be. The news stuff is about the actively managed funds. I guess some of the ones that were supposed to be conservative (like if your kid is in high school) weren't, and the treasurer is bitching about it.

Are you an Illinois resident? Consider College Illinois prepaid tuition. You can buy from 1-9 semesters of tuition for any combination of community college, university, or university+ (which includes U of I, the university plan doesn't anymore).

If the child doesn't attend in-state s/he gets, in the case of the university plan, the average $ amount of the tuition of the state schools to spend elsewhere (U of I excepted).

We just bought our first semester for our kids, and bought university. From what I read, it's a use it or lose it proposition on the university+, and admissions to U of I is quite competitive. Without knowing what my 5 year old will do in school, it's hard to pay for that just yet.

I would go with I-bonds but currently they have a crappy rates (0.1% fixed part and paying 0% for the current 6 month) Good thing about I-bond that earnings are not taxable if you use it for college payments, you will never go below principal amount invested, and inflation is not such a big issue as for other account types. Child will be able to use for anything, not only for college.

I've considered the same issue for my children. There was one investment vehicle that caught my eye, ricetrust.com. Minimum of $5000 per trust and $500 minimum per additional investment into the account. The child cannot touch it until 59 1/2 years old. 59 years of compounding and tax deffered is pretty enticing, however the fees are a little steep. Full disclosure, I've not been able to finance this yet, but it was very interesting to research nonetheless.

Get the kid some milk. Thats all he really wants anyway.

I am leaning towards the mutual funds. I will open up an account under my name and keep purchasing funds ( Ameritrade or Trowe sounds good so far). As far as i know as long as i dont sell there will be no taxes associated with it. One of my frieds was talking about creating a trust for this. I dont know much about trust or how it works and how do i file taxes with it. I will google it tonight to learn as much as i can. I know it will sound greedy but i would like to stay tax sheltered and good gains for this account ( AKA best of both worlds).

I have my eyes on HLEMX,NBMVX, RVFCX, RYVFX, WFTZX Funds. What do you guys would be better?

RedCelicaGT said: If the money is for retirement, try the fidelity 2050 fund. Every 5 years, until college age, move the investement to the newest fund (2055 when it comes out, 2060, etc.)

EDIT:
Symbol FFFHX

The expense ratio is over 4 times what vanguard's is(VFIFX)! 0.80 vs 0.19!

Yes, we are an illinois residents and UI grad. What happens if this boy could not make it to college? Can he save the money for retirement? Or a down payment for a house? I want this fund to be flexible.are there mothly mandatory contributions?

Go to their website and find out. This is a prepaid tuition plan. It's not retirement. It's not a savings account. If any beneficiary doesn't attend school, there are alternatives, but please read the website about them. I don't know all of it.

Do you guys have some kind of guaranteed education program in IL? I know in WA we have GET (http://www.get.wa.gov/). Basically, you lock in tuition at its current rate so that when your kid finally goes to college he'll be paying the rate that you locked in at. I'm not sure what happens if your kid decides to go to a private school or out-of-state. But it's definitely worth looking into.

Jobowoo said: Do you guys have some kind of guaranteed education program in IL? I know in WA we have GET (http://www.get.wa.gov/). Basically, you lock in tuition at its current rate so that when your kid finally goes to college he'll be paying the rate that you locked in at. I'm not sure what happens if your kid decides to go to a private school or out-of-state. But it's definitely worth looking into.
This is a bit misleading (and I don't blame you; the plan documents seem to imply that but not quite) in that the current rate that you can lock in in NOT the current tuition that is charged to students. It is significantly higher. The plan documents mention (though not a guarantee) that you will typically have to hold in for at least 2 years to just break-even. IOW, say the current tuition is $100. The rate that is offered to you (for lock-in) is not $100 but something higher like $120. In 2-3 years, tuition charged to students would rise to $120 or higher when you would break-even. So this is good only if you plan to use it several years down the road. Think of it as a front-loaded fund. In the long run (7-10 years or longer), you might do o.k. but not in the short run (2-3 years).

ETA: You dont have to attend college in WA; most colleges in the US (private or public) are covered. The reimbursement will be based on in-state tuition in WA at the time you use it.

ThePessimist said: I have several comments:

1) If you want to go with a 529 plan, I'd recommend Bright Directions rather than Bright Start. If you can find a fee-only financial planner to help you set up the Bright Directions account (rather than a commission-based bank or broker), you'll find the expenses much lower over the long run.

2) Opening up a mutual fund account in your name isn't optimal. Most funds have taxable distributions. You can open a custodial account (called an UTMA account after the relevant statute), where you'd use your son's SSN and he'd pay any taxes. If you make sure the account is opened under the Illinois UTMA, you'll be able to control your son's use of the account through age 21. (In many states, the kid gets control at 18.) The only disadvantage of an UTMA account is that it becomes your son's money - you can then only spend it on things for his benefit. Also note that him having a lot of money will greatly reduce his ability to get need-based college financial aid.

3) Seriously consider your goals. If you aren't fully comfortable with your retirement position, focus on that instead. Your son can always borrow for college, but you can't borrow for retirement. Plus, the less non-retirement money you and he have, the better your odds for financial aid.

ThePessimist i feel secure about my retirement funds and after all said and done i feel very comfortable with 2500$ a year contribution. I will start searching for Illinois UTMA , would you please point me to right direction. I have Fidelity and TD Ameritrade here locally, Would they know about Illinois UTMA?

I think a good place to read about college savings is Morningstar:
Morningstar | Personal Finance | College Savings
Morningstar: Alternatives to 529 College-Savings Plans

I haven't been in your situation, but these pages seem like they have a good (general) review of the topics you're asking about, if you haven't seen them already.

ThePessimist said: I have several comments:

1) If you want to go with a 529 plan, I'd recommend Bright Directions rather than Bright Start. If you can find a fee-only financial planner to help you set up the Bright Directions account (rather than a commission-based bank or broker), you'll find the expenses much lower over the long run.

2) Opening up a mutual fund account in your name isn't optimal. Most funds have taxable distributions. You can open a custodial account (called an UTMA account after the relevant statute), where you'd use your son's SSN and he'd pay any taxes. If you make sure the account is opened under the Illinois UTMA, you'll be able to control your son's use of the account through age 21. (In many states, the kid gets control at 18.) The only disadvantage of an UTMA account is that it becomes your son's money - you can then only spend it on things for his benefit. Also note that him having a lot of money will greatly reduce his ability to get need-based college financial aid.

3) Seriously consider your goals. If you aren't fully comfortable with your retirement position, focus on that instead. Your son can always borrow for college, but you can't borrow for retirement. Plus, the less non-retirement money you and he have, the better your odds for financial aid.

In regards to point 3, anyone have any good strategies around legally looking assetless in order to max out financial aid. The most common ones I see are based on some sort of insurance vehicle (VUL).

^^^^ How do you make a predication like "there won't be an IRS" and not follow it up with why you think that?

ClaimsGuy said: ^^^^ How do you make a predication like "there won't be an IRS" and not follow it up with why you think that?

I think IRS is forever, government will do everything to make sure to extract every tiny little cents from us, therefore i am not planning on any tricky Roth IRA settings. i am surprised to say it but i am willing to pay taxes under my control then IRS is demanding penalties and taxes from me later.

Go long Cheerios and Pull-ups.