I apologize if this is the wrong place for this. Mods-remove if needed.
My wife and I just had our first. A little girl. She’s pretty cool. We think we’re gonna keep her /s
Anyways the wife is home on baby leave and devouring Gilmore Girls for the fifth time. From time to time, I’m in the living room with her watching it. It is…a good show tbh. Great dialogue. I digress.
In on episode, Lorelai’s father Richard gifts her the financial gains from an investment he made for her when she was an infant. $75,000. A great windfall for sure. But it got me thinking-how could I do something similar for my daughter? What would be the best vehicle to accomplish this.
I obviously don’t expect the same returns as Richard gained on the investment for Lorelai. I, after all, am not a Yale alumnus (lowly state school offspring here) and am not known for making the best picks in the market. I have since distilled my portfolio down into an extremely boring albeit stable mix of stocks and practice DCA.
Anyways, how could I go about doing this for my daughter? Some sort of brokerage account for children? Thanks in advance.
Posted by hartzonfire
13 Comments
Not financial advice, etc:
When my daughter was born I started a 529 and gradually invested up to 50k over the first 3 years of her life. Mix of international and domestic index funds. She’s six and there’s already over 100k in there.
You could also do an UTMA but personally I would do a 529 first.
The point is to dump as much lump sum cash in there as early as possible, invest in low cost passively managed equity indices and then don’t touch it for 18 years. Don’t stock pick. Just buy indices with low fees. (I did go to an elite school and have a finance background and I still just buy indices)
Monthly 529 contributions for her account
Congrats on the little one. You’ll want a UTMA account which is easy to open at any major broker as long as you have her SSN. Below is a Google AI summary
An UTMA (Uniform Transfers to Minors Act) account is a custodial account allowing adults to gift assets (cash, stocks, real estate, etc.) to a minor, managed by a custodian until the minor reaches legal age (18 or 21, depending on state law). It offers flexibility as funds can be used for any purpose benefiting the child, unlike 529s, but gifts are irrevocable, and assets count against the child for financial aid. UTMA expands on the UGMA (Uniform Gifts to Minors Act) by allowing more asset types beyond just financial instruments, making it a versatile tool for saving for a child’s future.
Key Features of UTMA Accounts
Custodian: An adult manages the account and investments for the minor’s benefit.
Ownership: The minor owns the assets, reported under their Social Security Number, but the custodian controls them.
Irrevocable Gifts: Once assets are in the account, the gift cannot be taken back.
Flexibility: Funds can be used for education, living expenses, cars, or anything that benefits the minor.
No Contribution Limits (with tax implications): No limits on amount, but large gifts may trigger gift tax rules, notes Vanguard and Thrivent.com.
Age of Termination: The custodian must hand over control when the child reaches the state-defined age (typically 18 or 21).
I do a UTMA because I’m planning to keep it a secret until after college. The downside is the gains are taxed.
Start with a 529. You can roll a portion of it into a roth IRA if she decides to not use it for school – unsure of max amount do some digging.
Open a 529 for her. If you end up with too much for school you can eventually roll it into a Roth IRA for her. All the gains will be tax free
You might also get a state tax deduction for the contributions depending on where you live
529 or other tax deferred account. As much as you can afford. Put it all in broad stock fund like VOO. Add to it regularly. She’ll be quite well off when she reaches 18.
Here are a few options:
1. Use your own taxable account and simply earmark a portion to gift to your child. Keep track of the amount you allocate and when, then keep track of dividends and growth. When you’re ready to gift it either withdraw the money and pay the capital gain tax, or directly transfer the shares to their own account.
2. A 529 has some tax advantages if the money is spent on education, but has a tax penalty if you use it for something else. Money is in your name until you choose to withdraw it to pay for education expenses. You can always gift unused money to child when they graduate if desired (either by accumulating it and paying education expenses from other cashflow, or rolling into Roth for the child, or by paying the tax penalty and withdrawing the lump sum remaining.
3. Custodial Roth IRA: This can only be contributed to when the child has earned income. Retirement accounts have no impact on college financial aid.
4. UGMA/UTMA brokerage account in her name. The money belongs to the child after it’s contributed and can be used however they want after the age of majority for your state. This option has the largest impact on financial aid for college and the money you contribute is irrevocable.
I used options 1, 2, and 3. 1) We earmarked contributions to our own taxable brokerage account for my son. 2) We opened a 529 and contributed enough to pay for a portion of expected education expenses. 3) When my son got a fast food job in highschool we opened a Roth for him and “matched” his income with a contribution to a Roth. When he turned 18 we converted it from a custodial Roth account a personal Roth IRA account. I did not opt for an UTMA account primarily because I couldn’t be 100% certain of my own financial future – there’s a possibility we might need the money through a job loss or other crisis – and secondarily on the small chance that my child grew into a person I really don’t want to give money to. This is something you certainly hope and work toward avoiding but I’ve seen it happen to others…
Fund your retirement before funding a UTMA or 529.
You can borrow for college but cannot borrow to fund your retirement.
One thing to look at is who owns the 529. The FAFSA weights things differently for different owners, which means if mom and dad owns it it’s not counted as much as assets for the child. (It’s still counted.)
I personally do a 529 and UTMA for my kids. I prioritize the 529 because of the tax advantages it has, but I want my kids to be able to get a nice car when they go off to college, which is the main reason for the UTMA. They will be able to choose how that money is spent ultimately, but reliable transportation is important enough in my mind to justify the separate account. All in index funds/VOO
I don’t like 529 because my kid may not go to college.
UTMA account is my pick with 100% VOO or VTI
I would hold off until the details for the Trump account are finalized. If you contribute to another account now, those contributions will be locked in. Not every person wants to use money for college. Your kid might want to join the navy or a something and then college savings will have no effect on their life. UTMA turns into a regular brokerage account so you run the risk of having the child wipe the account right as they get their hands on it.
We are about to have our first child and I’ll be waiting to see what the benefits of the trump account are before locking contributions elsewhere. I feel this is the pragmatic choice but that’s easier to say for me since my child isn’t born yet.