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How to Invest for Niece/Nephew

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I have a niece who has 2 sets of parents and gets spoiled with presents every holiday/birthday. I don't want to just buy her another toy, I would rather transfer money to an account. My thought is that by the time she is older she could use the money to buy a car, buy a house, travel, or pay for college. I don't want to do a 529 plan because I want her to have the option to spend how she chooses. I looked at UGMA accounts and don't think that is the best option either.

1.) Personally invest in index fund with a separate broker under my name. Pay her out minus taxes when she wants it. The only downside is the increase in my salary and potential tax impact. I would probably do a commission free index etf
2.) Invest in UGMA, could affect financial assistance, no control over when she gets it
3.) Savings or bonds have too low of yield

What is the best option?

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Forget all this money talk.  Invest in her ability to be successful in life.  That'll go further than any monetary inves... (more)

speedracer714 (Mar. 30, 2017 @ 9:36p) |

I agree with you, but only if you also send a card: Human Fund Card

kenmoreland (Mar. 31, 2017 @ 5:02a) |

That also depends on the available 529 plan options especially those in your state that qualify for tax deductions. Some... (more)

Shandril (Apr. 03, 2017 @ 2:48p) |

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rated:
I'd use option 1.

When the time is right, just gift her the account and let her deal with the taxes in what will likely be a zip doodle tax bracket.

Be sure to pass along the tax basis info.

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Paying tax is not necessarily a downside. It just mean you have a capital gain/dividends. You are still way ahead than buying a toy.

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Put money into your own fund. When she turns 18, surprise her with the balance (say it is $10K). She will be blown away...

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Ah, the ol' gift with strings discussion.  Seriously, just give her a present on her birthday and be done with it.  If you separately want to earmark some of your own savings to do nice things for her when she's older, like help her buy a car or study abroad or something else that she wouldn't otherwise be able to do, then do that.  But telling her that instead of a gift, you put a little something away for her for the future - well, that's one way to take all the fun out of a special occasion.

Hard to tell from your post how old she is, or how big a gift you are contemplating, but trust me - when she's older, there will be plenty of things where you can contribute by sponsoring some extracurricular activity or giving her spending money for a school trip or visiting her in college and taking her on a shopping spree, etc.  Let a gift be a gift.



 

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Ok thank you for the advice. I am going to open a Vanguard broker account in my name and add each year. Then when she is 18 (she is 4 now), transfer the s&p500 etf shares to her name.

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wilked said:   Put money into your own fund. When she turns 18, surprise her with the balance (say it is $10K). She will be blown away...
  I did something for my nephew.  An only child and the parents and grandparents spoiled him rotten.  I eventually gave him the money to buy a NEW car as a lump sum gift. 

Ungrateful kid just ended up putting it up his nose.  Kids who live the entitled life seem to be the worst.  Because of this, he wont see a dime of inheritance from me (if he lives that long) and I am just going to give it to Boys & Girls Town.

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ESA accounts are like Roth's for a kids education, not just college.  More flexible than a 529, but limit $2k/year.  Still worthwhile.

https://www.irs.gov/publications/p970/ch07.html

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wilked said:   Put money into your own fund. When she turns 18, surprise her with the balance (say it is $10K). She will be blown away...
  downside to that is, if you don't tell her, she thinks you're stiffing her. If you explain it to briefly to her, she won't understand it, and will either under estimate or over estimate what she will get.

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Would you be able to open a small account in a robo broker in their name? Wealthfront is no fees under 10K, but it might impact their FAFSA.

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Dovetonsils said:   
wilked said:   Put money into your own fund. When she turns 18, surprise her with the balance (say it is $10K). She will be blown away...
  I did something for my nephew.  An only child and the parents and grandparents spoiled him rotten.  I eventually gave him the money to buy a NEW car as a lump sum gift. 

Ungrateful kid just ended up putting it up his nose.  Kids who live the entitled life seem to be the worst.  Because of this, he wont see a dime of inheritance from me (if he lives that long) and I am just going to give it to Boys & Girls Town.

  
wow what a great  uncle.  yep, hate to see when u do this and other side is ungrateful or takes it for granted because, they either get everything they ask for.  Need to put sense in to those types of kids to go see the real world of poverty, children of 3rd world country

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make a donation to the human fund.

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ajish4 said:   Ok thank you for the advice. I am going to open a Vanguard broker account in my name and add each year. Then when she is 18 (she is 4 now), transfer the s&p500 etf shares to her name.
Depending on the balance, you may go over the annual exemption limit for gifting it all to her at 18. Secondly, most kids are not able to handle well a large sum of money when they are 18. So for tax purposes and maturity reasons, you may want to gift it to her in several events over a few years, say $5k at 18, $5 k at 20, $10k when graduating, etc...

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xerty said:   ESA accounts are like Roth's for a kids education, not just college.  More flexible than a 529, but limit $2k/year.  Still worthwhile.

https://www.irs.gov/publications/p970/ch07.html

For non-parents, that's a debatable statement. To avoid over-funding (the $2k limit is from all source towards one beneficiary), most ESA accounts require a parent of the beneficiary to be the responsible person in which case you no longer control how it is invested. And you cannot contribute to an ESA once the beneficiary is above 18 (or you have to pay 6% tax).

ESAs can be used for high-school expenses however. But ESAs also have to be used by beneficiaries by age 30 while 529 plans generally have no such time limits (except prepaid tuition credits).

Personally, I view ESA accounts as best for parents who have significant private (elementary/middle/high) school expenses. But for college, and for other relatives than parents, I see little advantage to use those vs 529 plans unless maybe your state 529 plan has very bad investment options (then it may be worth investing in another 529 plan altogether).

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As an Uncle (I have no kids) this is my advice.

Do not tell them. You do not want a 17 year old kid graduating high school thinking they have money "to pay for college" and then find out it's only 2k. Don't get their hopes up.

Do not put it in their name.

Invest extra into a normal index fund and surprise them.

Life happens. What happens if you have kids, get punched in the face with life and have to dip into "their" money to help put food in your kids Mouth? You don't want to have to explain how "their" college fund is now gone.

I have helped various nieces/nephews and have learned surprise is better. I take being an uncle serious. Each of my siblings have named a kid after me and another nephew sends me a Father's Day cards every year. So, I think my advice does have merit.

If you want something visible, I believe you can still buy savings bonds and they are tax free if used for education. Not sure if that is still the case so check.

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Shandril said:   
xerty said:   ESA accounts are like Roth's for a kids education, not just college.  More flexible than a 529, but limit $2k/year.  Still worthwhile.

https://www.irs.gov/publications/p970/ch07.html

For non-parents, that's a debatable statement. To avoid over-funding (the $2k limit is from all source towards one beneficiary), most ESA accounts require a parent of the beneficiary to be the responsible person in which case you no longer control how it is invested. And you cannot contribute to an ESA once the beneficiary is above 18 (or you have to pay 6% tax).

ESAs can be used for high-school expenses however. But ESAs also have to be used by beneficiaries by age 30 while 529 plans generally have no such time limits (except prepaid tuition credits).

Personally, I view ESA accounts as best for parents who have significant private (elementary/middle/high) school expenses. But for college, and for other relatives than parents, I see little advantage to use those vs 529 plans unless maybe your state 529 plan has very bad investment options (then it may be worth investing in another 529 plan altogether).

  Thanks for the additional details from a non-parent's perspective.  I haven't tried to be the responsible party on my niece/nephew's accounts, but I am authorized to make investments.  For me the biggest advantage of ESAs are that you can get a full brokerage account and not some dumbed down handful of mutual funds to invest in.  Of course, if you just want an index fund or two, picking a good 529 is fine.  I like to pick my own stocks. 

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if you think your cumulative gift will end up more than the yearly gift tax exemption(at age of 18), then you need to plan. Otherwise just open an account in your name at Vanguard to buy Index fund or ETF.

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Exceeding annual gift tax limit is not a big deal for the vast majority of people. You just need to file a form and the excess (over the annual limit) simply counts towards the life time exemption (> 5 mil. for federal tax). No actual tax needs to be paid. If you are married, the annual limit of 14k effectively becomes 28k (14k from each spouse).

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same situation, but i have just been gifting money and my brother puts it in her 529 account...any reason i cant start a 529 for myself and possibly use it for graduate school, future kids college, or gift it to my niece for college if all else fails?

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ezletzpla said:   same situation, but i have just been gifting money and my brother puts it in her 529 account...any reason i cant start a 529 for myself and possibly use it for graduate school, future kids college, or gift it to my niece for college if all else fails?
  
Yes you can set up a 529 with yourself as a beneficiary and then change it to someone else later.

Theres no tax impact to changing the beneficiary.

https://www.irs.gov/uac/529-plans-questions-and-answers
 

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The annual gift exemption doesn't count if you pay a university directly.

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ajish4 said:   How to Invest for Niece/Nephew
  
Forget all this money talk.  Invest in her ability to be successful in life.  That'll go further than any monetary investment.

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imbatman said:   make a donation to the human fund.
  I agree with you, but only if you also send a card: Human Fund Card 

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xerty said:   Thanks for the additional details from a non-parent's perspective.  I haven't tried to be the responsible party on my niece/nephew's accounts, but I am authorized to make investments.  For me the biggest advantage of ESAs are that you can get a full brokerage account and not some dumbed down handful of mutual funds to invest in.  Of course, if you just want an index fund or two, picking a good 529 is fine.  I like to pick my own stocks. 
That also depends on the available 529 plan options especially those in your state that qualify for tax deductions. Some 529 plans have reasonably priced and diverse options. Some are pretty lacking and/or expensive. In which case, I'd also agree with doing it on your own in an ESA. Good point. Or at least have the ESA be part of the plan if you may want to contribute more than $2k/yr for a beneficiary.  

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