• filter:

New child - what type of accounts to open?

  • Page :
  • 1
  • Text Only
  • Search this Topic »
Voting History
rated:
My wife and I just had our first child, and I have have friends and relatives wanting to give gifts of money.

I live in PA and have been considering a 529 as well as some type of savings account (from the local Credit Union.)

Please critique my logic here. Even though we do not max our 401k (we DO try to max Roth IRA), I feel the 529 would be good for relatives wishing to contribute to his "college fund." The other account (savings) would be for fun or other misc. expenses.

Am I on the right track here with my logic? Please let me know your thoughts.

Member Summary
Staff Summary
Thanks for visiting FatWallet.com. Join for free to remove this ad.

rated:
Add the child as an authorized user on all your credit cards.  That way when he or she is asking you for a loan or to cosign 18 years from now, you can say, "you have excellent credit.  Get your own loan."

rated:
CorradoJr said:   My wife and I just had our first child, and I have have friends and relatives wanting to give gifts of money.

I live in PA and have been considering a 529 as well as some type of savings account (from the local Credit Union.)

Please critique my logic here. Even though we do not max our 401k (we DO try to max Roth IRA), I feel the 529 would be good for relatives wishing to contribute to his "college fund." The other account (savings) would be for fun or other misc. expenses.

Am I on the right track here with my logic? Please let me know your thoughts.

  Save for retirement, not college because 1) you can't borrow for retirement, and 2) the current federal financial aid rules exclude retirement savings in the calculation of expected family benefit.

rated:
Chyvan said:   Add the child as an authorized user on all your credit cards.  That way when he or she is asking you for a loan or to cosign 18 years from now, you can say, "you have excellent credit.  Get your own loan."
  
Whats the point of this? If you add them as an authorized user now vs. when they are 16 things will still remain the same. How good their credit is is based on the account they are tied to. So if you add them now vs. later, it makes no difference on the account (age of account, late payments, etc...) since that's determined by you (the parent).

My point being, is if you have a 10 year old credit card and you add them as an authorized user now, vs. later - it makes no impact on how good the account is as far as credit score.

rated:
"Am I on the right track here with my logic?"

Seems right to me.

rated:
justignoredem said:   So if you add them now vs. later, it makes no difference on the account

Have you done this? When I did it for the 21 yo neighbor kid, the date of the account was the date it was first reported on his credit bureau report, not the date that I opened it.

For that reason, I disagree with you. I think it's important to have average age of accounts be 18+ years. Allows the kid to do a lot of churning with no impact.

Besides that, the kid can't intercept the mail right now and go on a shopping spree.
  

rated:
A 529 opened by you will count against your child's ability to qualify for financial aid.

rated:
OP - If you are talking about $50 here and there, just put the money in the kid's savings account.  If you are talking about significant gifts, anything amounting to $1,000 or more per year, then you should start thinking about strategies that will be most effective for generating a good return, minimizing taxes, and preserving your child's ability to qualify for financial aid.  That would be another topic unto itself.

Agree with the posters who say to max the retirement accounts first.  Don't trickle money into any 529 plan if you aren't first fully contributing to the retirement accounts.

Adding an infant to your credit accounts is overkill IMO.  I've been getting my kids added as authorized users to one or two credit cards around the time they start driving so that they can buy gas and pay for other miscellaneous expenses.  By the time they are 18, they have been able to easily qualify for credit on their own.  That's plenty good enough.

rated:
Chyvan said:   
justignoredem said:   So if you add them now vs. later, it makes no difference on the account

Have you done this? When I did it for the 21 yo neighbor kid, the date of the account was the date it was first reported on his credit bureau report, not the date that I opened it.

For that reason, I disagree with you. I think it's important to have average age of accounts be 18+ years. Allows the kid to do a lot of churning with no impact.

Besides that, the kid can't intercept the mail right now and go on a shopping spree.
  

  I've added MANY AUs (don't ask) and they all have reported the opened date accurately. Are you confusing something like "first reported date" with "opened date?" If what you said was true, the entire piggybacking industry wouldn't exist really.

rated:
Here's what we have done so far for our one-month-old:

* Opened a frequent-flyer account for the kid. (I just thought this would be funny when they're like "congrats on having the account open for twenty years!" and the kid is twenty years old.)

* We already fully fund our workplace retirement plans and Roth IRAs.

* Used the qualifying-life-event opportunity with my employer's benefits to make a few changes. Opened a flexible savings account and funded $500 pretax (not sure how much we will spend on eligible expenses, but confirmed that $500 rolls over and was just conservative while still saving some money). Probably could have gone higher than $500 in the FSA -- this was just a conservative way to get "free" money by reducing our taxable income. Made sure my employer group life insurance was ok. Made sure health plan was ok for the remainder of the year.

* Doing the math for 2018 it looks like we will PROBABLY opt into a HDHP with employer contribution and HSA, but not sure yet. This was a pretty good year to be on a traditional health plan due to labor and delivery expenses.

Probably the single biggest expense we expect to make for our child is college tuition. We think that money held in retirement savings doesn't affect expected family contribution under any current formula so we're stashing as much money as we possibly can in those savings. Otherwise we're kind of lost in the weeds and have no real asset plan. This stuff seems grossly complicated ( https://www.forbes.com/sites/troyonink/2017/01/08/2017-guide-to-college-financial-aid-the-fafsa-and-css-profile/ ) and I'm not sure we'll make the right choices.

We're currently holding a fair amount of cash (which hurts in this market) and seriously considering buying a house. Problem is that in our ZIP code a mortgage payment would be about 2x-3x higher than what we're paying in rent for property with comparable square feet and amenities. Lots of reasons to buy anyway, and it doesn't hurt that some financial aid formulas are more lenient with home equity than with cash savings.

So the only account we've opened so far is:

* In our state, there is a small state tax incentive to fund a 529 college savings plan. The kid doesn't have an SSN yet, so I opened a 529 in my name and double checked that I can redesignate the beneficiary, then funded it up to the limit that provides state tax benefits. A wrinkle here -- the vendor we used seems to have chosen the wrong plan -- I asked them to pick "Fidelity college 2036 index funds" w/ heavy market exposure and an 0.18% expense ratio, but they somehow ignored my instructions and based on the beneficiary's birthdate (mine) they invested my deposit in the crummy "you are already going to college" mostly-cash 0.8% mutual-fund option. I had a surprisingly lucid conversation via secure message about this.

If we assume that we will have to spend SOME out-of-pocket money on college, then I think it makes sense for that money to come out of a 529 versus other (taxable) investments or savings. A 529 is pretty special assets since they grow tax-free and can be distributed tax-free for education expenses (this seems way too good to be true and must be contributing to tuition sticker-price inflation) and since the beneficiary can be changed at any time.

Things we have not done yet:

* Haven't yet set up the kid as an AU on any CCs. Are there any good guides for this? I know that Amex has a 15 year age minimum. I guess I'll review http://www.creditcards.com/credit-card-news/what-is-the-minimum-... . (And then in the future we need to make some very careful parenting decisions so that the kid doesn't actually spend any money… I am pretty sure that if the kid is an AU of our Chase CC, he can call up Chase and ask for a replacement card and spend money with it and we're responsible for any charges.)

* Have not yet gotten the kid any earned income. I really wish there were some way to get income so that we could open a Roth IRA and start that tax-free compound interest early (see e.g. http://natalimorris.com/blog/2015/09/29/why-my-3-year-old-has-a-... )

* Have not bought any savings bonds (series EE bonds were a popular grandparent gift when I was younger but rates were also much higher then)

* No bank account churning yet. There is one local bank that offers a child savings plan where you get like a $1000 bonus after contributing $25 per month for 18 years (https://www.citizensbank.com/savings/savings-accounts/college-plan.aspx) but the XIRR is worse than we can earn in a CD right now.

* Have not yet priced out a term life policy (non employer provided) or long-term disability insurance. This seems like a no brainer -- if I die in the next 20 years something will need to replace my income now that there is a dependent in the mix.

* Not sure what else to do, will be following this thread and appreciate any other advice!

rated:
Here's what I did. Used the money to buy diapers and other things the kid needed.

rated:
jaytrader said:     I've added MANY AUs (don't ask) and they all have reported the opened date accurately. Are you confusing something like "first reported date" with "opened date?" If what you said was true, the entire piggybacking industry wouldn't exist really.

I've only done it twice, and it may have been my choice of issuers that was why I have a different result.
  

rated:
Chyvan said:   
jaytrader said:     I've added MANY AUs (don't ask) and they all have reported the opened date accurately. Are you confusing something like "first reported date" with "opened date?" If what you said was true, the entire piggybacking industry wouldn't exist really.

I've only done it twice, and it may have been my choice of issuers that was why I have a different result.
  

  
Probably the issuer.  Basically bad luck.  Most CC companies do not report the way you described.
 

rated:
daw4888 said:   A 529 opened by you will count against your child's ability to qualify for financial aid.
  
I don't think it is completely true.

With regards to 529, depends on how rich you are or how rich you expect to be when you go to college. I knew filling out the FAFSA was a complete waste of time and it was. It is best to upfront guess where you would be on the aid front and if you are not going to get aid, do stuff that will benefit you - e.g. 529. Of course - this should not be at the expense of 401K etc. So this is yet another thing to all your tools versus a substitution. The other trick is to understand the rules about transferring appreciated stocks to the college going kid and having his tax rate apply to the appreciated stock. 

rated:
ESAs are small, $2k/year, but can be self directed (not just a few mutual funds like 529s) and can be spent on pre-college education expenses with a much wider mandate than 529s so they might be gone by the time FAFSA checks.

rated:
justignoredem said:   
Chyvan said:   Add the child as an authorized user on all your credit cards.  That way when he or she is asking you for a loan or to cosign 18 years from now, you can say, "you have excellent credit.  Get your own loan."
  
Whats the point of this? If you add them as an authorized user now vs. when they are 16 things will still remain the same. How good their credit is is based on the account they are tied to. So if you add them now vs. later, it makes no difference on the account (age of account, late payments, etc...) since that's determined by you (the parent).

My point being, is if you have a 10 year old credit card and you add them as an authorized user now, vs. later - it makes no impact on how good the account is as far as credit score.

  Amex uses the date the AU account was created, not the date the original account was opened.

rated:
Open a bank account for the child where you bank (and try to keep the account there). I love walking into a branch and hearing the teller say "thank you for banking with us for xx [long pause as they look up at me confused] years" because my parents opened an account at that bank in the year I was born.

More seriously, I second dcwilbur in asking how much money you're talking about.

rated:
CorradoJr said:   My wife and I just had our first child, and I have have friends and relatives wanting to give gifts of money.

I live in PA and have been considering a 529 as well as some type of savings account (from the local Credit Union.)

Please critique my logic here. Even though we do not max our 401k (we DO try to max Roth IRA), I feel the 529 would be good for relatives wishing to contribute to his "college fund." The other account (savings) would be for fun or other misc. expenses.

Am I on the right track here with my logic? Please let me know your thoughts.

  I'm going to take a different line than most of the other replies here with all their random tidbits. The correct answer to your question is to open whichever account that will make the gift givers the most happy. You don't need to optimize taxes, you need to optimize the joy of the gift-givers. (Perhaps you'll get more gifts in the future.) I'd certainly open a 529 so you can say in good faith that the gifts received will pay for college.

The OP never mentioned that he himself would be contributing to these accounts, so the retirement vs 529 debate doesn't matter here. The account is merely serving as a place to hold gifts.

rated:
When our kids were born we opened savings accounts for them and that is where most of their birthday/ Christmas/ gift money is stored. We also opened Roth IRA's that we intend to use for their college. We plan to start Roths for them when they hit about 15-16.

rated:
Unless you already maxing retirement, and are debt free...don't worry with the kids college fund.

Focus on your own situation, the college costs will be workable if you've been on the right path for many years.



All that said...if you have excess money, use the best 529 you can find. Our state gives 20% tax credit, up to $5k....so a free $1k if you max it out. And everyone can get it....including relatives that want to give.

  • Quick Reply:  Have something quick to contribute? Just reply below and you're done! hide Quick Reply
     
    Click here for full-featured reply.


Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2017