Index funds are shrewd investment vehicles for children because they often have low fees. The savings over a lifetime can be enormous. Deciding to use an index fund is the easy part. The real question is how and when the child will gain control of the investment. If you don’t want to give your 18-to-21-year-old child complete access to a large chunk of money all at once, consider using a trust account.
Index Funds
Index funds have lower fees because they are passively managed -- you're not paying for a manager to make investment decisions. Indexes are benchmarks, so your fund won't underperform, allowing you to stay committed to the fund for the long term. Also, you aren't distracted by trying to pick winning funds and can spend your time on other investing issues, such as asset allocation. You can buy index shares through a mutual fund or exchange-traded fund. If you simply set up a fund in a child’s name at a mutual fund company or brokerage, the child will be able to control it at age 18 or 21, depending on your state’s laws. This method gives you the widest latitude in picking index funds but the least control over the money's use. The money you invest in the child’s fund is subject to gift tax. As of 2013, you can give up to $14,000 to each recipient without triggering a gift tax. The first $5.25 million of taxable gifts are exempt from taxation over your lifetime. If your child is old enough to earn income, she can open an individual retirement account and invest her contributions in index funds.
You can set up a custodial account for a child and invest it in index funds. Custodial accounts are created under state laws, the Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act. The first $1,000 of earnings per year are tax-free and the second $1,000 are taxed at the child’s rate. Once again, the child receives control of the money at age 18 or 21, depending on your state. You can act as the trustee of the account and pick out index funds investments. Money in a custodial account will count as a resource and possibly reduce the amount of educational financial aid available to the child. Another type of custodial account, known as a 529 account, can be used to save for a child’s education, but you may have less say on how the money is invested.
Crummey Trusts
If you want more control over the child’s money, you can set up a Crummey Trust with the child as the beneficiary. The trust has special rules that allow you to take advantage of the gift tax rules and exclusions. You can be the trustee or you can name someone else. Trusts allow you to set the rules on how the assets will be distributed to the beneficiary. You can set distribution conditions including age, allowable uses of the money and attainment of life events, such as marriage or having children. You can set up the trust with a mutual fund company and direct the investment of the fund assets into index funds. Trusts can become complicated and have tax implications that you will want to explore with an expert before proceeding.
Kiss Trusts
A unique alternative is a Kiss Trust, a patented trust account offered by Eastern Point Trust Company. It is an irrevocable trust -- once you place money in it, you can’t reclaim it as you can with a revocable trust. The innovation of the Kiss Trust is that it inexpensive and quick to set up online. You can choose from thousands of investment options, including index mutual funds and annuities that invest in index funds. Eastern Point acts as the trustee. The fund doesn't count as a resource when the child applies for educational aid. You can set up distribution rules that are as simple or complex as you want.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.
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Investing in index funds for your kids or teens is a savvy move. Index funds offer diversity without you needing a finance degree. They spread your investment across multiple companies, reducing the risk of putting all your cash in one place. Plus, they're known for steady growth over time.
It is generally impossible for minors to open their own brokerage account, but custodial accounts and joint accounts allow young people to begin their investing journey with varying amounts of adult supervision.
Your kids must be at least 18 years old before they can open a brokerage account of their very own. But parents can open an account on their behalf. Opening a brokerage account for kids will offer several key benefits, including the following.
A Roth IRA for a child needs to be started and managed by a parent or other adult as a custodial account. The child needs a Social Security or other tax identification number, plus earned income. The Roth IRA stays a custodial account until the child reaches the age of majority, which is 18 in most states.
In general, the Roth IRA is the IRA of choice for minors who have limited income now. By the same logic, it's often recommended for adults who expect to be in a higher tax bracket in the future. "If a child keeps [a Roth] until age 59½ (under today's rules), any withdrawal will be tax-free.
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
529 plans. A 529 plan is a college savings account that offers tax benefits and allows the contributions to be invested into available stock and bond funds. ...
Walt Disney (DIS): DIS stock could prove to be both a fun and profitable investment for your children. Lowe's (LOW): LOW stock presents another opportunity for capital and dividend growth. Realty Income (O): Today's high interest rate environment has created a great entry point for a long-term O stock position.
ETFs are generally better for frequent trading because you can buy and sell shares throughout the trading day.Index mutual funds only let you buy and sell at the very end of each trading day. ETFs also give you up-to-date information on the fund investment value throughout the trading day.
You can use UniqueStockGift or GiveAShare to order physical stocks printed and shipped to be framed. For example, consider buying a 'physical' share of Disney for a child who is a big Disney fan. The stock will be purchased at market value, and then the security will be issued in the gift recipient's name.
Opening a custodial brokerage account allows parents or guardians to introduce children to investing at an early age. Factors to consider when selecting a brokerage firm for a child's account include fees, investment options, and educational resources.
Once you're ready to start investing, it's time to open and fund a brokerage account. Anyone at least 18 years old can open an online brokerage account. People who are younger will need a parent's assistance. Parents can either open a brokerage account on their teen's behalf or set up a custodial account.
All investments on behalf of minors must be conducted by a guardian. The guardian assumes the responsibility of overseeing the minor's investments and making decisions in the minor's best interests. Typically, parents serve as the natural guardians of their underage children.
Yes.Many banks, brokerages, and other financial institutions offer IRAs to their customers, but not all offer IRAs for children. The difference is that a child's IRA is a custodial account managed by a parent until the child reaches adulthood.
Introduction: My name is Dan Stracke, I am a homely, gleaming, glamorous, inquisitive, homely, gorgeous, light person who loves writing and wants to share my knowledge and understanding with you.
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