Investing in Your Child's Tomorrow with the Right Accounts and Strategies - Expert Edition Episode 49
In today's episode, I want to talk about how to save money for your kids in a smart way. I have three kids and I've been saving for them so they don't have to worry about money for school or other big things in the future. I use special savings accounts like 529s for college, Roth IRAs for retirement, and custodial brokerage accounts where they can pick stocks. It's important for you to save for yourself first before saving for your kids. I want to help you understand these accounts and how to use them, so you can make sure your kids have a good start in life.
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TRANSCRIPT:
Naseema: [00:00:00] As of January 29th, 2024, my kids combined net worth is $103,222.07. So that's between my three kids. And so I want to talk to you about investing for your kids. Now, this question came up because today my friend texted me about investing for her kids. What kind of account should they have?
What if our kids don't go to college, whatever, but I'm going to break down and I have talked about investing in this podcast, but I want to give you a big overview of the accounts that my kids have the hierarchy of those accounts and why I chose to invest in those accounts. So the biggest bulk of their money.
Is in a 529. 529 is their college savings fund and it was important for me number 1 to have their college savings fund because as you may or may [00:01:00] not know, I graduated with 2 bachelor's degrees with $180,000 in student loans that did not have access to any money to pay for college. And I did not.
Want my kids to have to have debt if they decided to pursue higher education. Now, it's debatable whether they'll go to college, what college education will look like, but it also as things change what these plans are able to use for change. But I'll talk about the pros and cons of each plans.
After I summarize them, so the bulk is in their 529s. Then the kids both have a Roth because they generate earned income from my business. They both have a Roth IRA. So their own retirement account. So that's the 2nd bulk. And then they have custodial brokerage accounts that I let them pick individual stocks in.
And so that's the smallest bucket. 3 buckets again, is there 529, which is their college savings fund their Roth [00:02:00] IRAs and then their custodial brokerage are universal transfer to minors accounts. so people always ask what accounts did I open up for my kids? And first of all, I always caveat, I always say that you should not be investing for your kids, if at a minimum, you are not. Maxing out your own Roth IRA or contributing to your company's retirement account, at least up to the match. If you're not doing those things for yourself, miss me with those kids. Okay. You need to focus on yourself because the greatest gift you can give to your kids is making sure you're financially stable.
To answer the question of the hierarchy of the accounts again, the biggest focus in the 529, then the next biggest is the Roth IRA. And then after that, they have the custodial accounts. And let me just let, how those funds will be spent. 1st of all, Roth IRA is for educational. Expenses[00:03:00] but I'll break down, you can actually use it for more and that's going to be in my justification for why it's the biggest account.
The Roth IRA is going to be their retirement funds. So they can access a Roth IRA in their retirement, but I also like to use Roth IRA as a backup emergency fund because funds in that account say if they really, really need it. Okay. Any of the principal or any of the contributions that I put towards the account, so say I put $5,000 a year just to give you a round number, $5,000 a year for 10 years, $50,000.
Hey, I put $50,000 in that account. $50,000 is accessible at any time to be pulled out tax and penalty free. The goal is for them to use that in retirement, but they also have access to use that before if they needed to, but hopefully they won't. And then the custodial brokerage account, or the universal transfer to minor account is there where I put money in monthly, a fixed amount anywhere [00:04:00] from 20 to 100 and I let them pick individual stocks in those accounts just to train my kids to be owners instead of consumers.
In the other accounts, all their stuff is an index funds. I'm a firm believer index funds. That's why these account is just a small account. Once their account starts to grow substantially, I'll put all that money into index funds, but they'll still be like a small amount. They can't pick individual styles for it's just a way to reshape and reframe consumerism for my kids.
So. Why is the bulk of my money in a 529 the bulk of my money is in a 529 again, because I do not want my kids to have to go into debt to go to school. But the 529 is also hella dope because it can be used for other things. You can use a 529 for apprenticeships. You can use a 529 for homeschooling.
Is you can get a repayment of up to 10, 000 in student loans. [00:05:00] You can get reimbursed for scholarship funds. You can transfer a 529 for 1 sibling to the next. Say, my oldest daughter does not use it for school. Now, her sibling can use it 1 of her siblings can use that money and it still continues to grow in that account.
Tax free. Because of the secures act, you can take a 35, 000 of that. If that account has been open for at least 13 years after the child turns 18 and put that money into an IRA. If they decide that. They don't want to go to college 35, 000 dollars of that. Now, you can put into their retirement fund, and it continues to grow tax free until their retirement.
And worst case scenario, if they don't go to college, the money is sitting in an account. You could pay a 10 percent penalty and just take the damn money. Okay. The growth will be worth the penalty and that's the worst case scenario. But I want to use this account as a legacy building tool, because you can change [00:06:00] the beneficiary at any time.
I want to have that as a go to source of funds for. My kids, my grandkids it'll live in 1 place so that anybody that needs access to these funds for all of those reasons again listed homeschooling, apprenticeship, college, whatever they can use those funds. So that's why the bulk of their net worth is tied up into a 529 after that,
they have their retirement account. I just think there's nothing better than planning for retirement than now, and they don't have to have a lot set away to be able to retire very comfortably. And so I wanted to start those accounts now so that. They'll have a good, solid foundation when they go out into the workforce to bills on.
So when they retire, my kids will be set and I'll set them up for early retirement or to take many retirements by being able to live off of that money. And the tax [00:07:00] advantages of a Roth IRA. Let's talk about the tax advantages of a 529 1st, 529 is that money that you put in their gross tax and penalty free when you take that money out, if you use it for educational expenses, it's not taxed.
There's no penalty if you take the money out and use it for something else. Because you don't have any other way to use it 10 percent penalty for a 520. For a Roth IRA, the money that she put into a Roth IRA is after tax money. Therefore, the money that grows in that account is in tax. And when you go to pull that money out in retirement, there's no taxes.
And then for a custodial brokerage, you have taxes as an account grows and, there's no penalty for taking that money out at any time, but just know that you do get taxed on that money in the account. It is a taxable account and talk to your CPA on how that's tax, but it's capital gains tax. It's a different tax code.
There's the bonus to that is that money you can [00:08:00] use for whatever you want. So the things that I plan on putting, and I'm going to put substantially more amount of money in their custodial brokerage account is I want to use that for a down payment on their 1st car or to pay for their 1st car and a down payment on their 1st multifamily or house that they're going to house hack.
And that's how I set it up. That's how it's going to be written out. That's their first property is going to have to be a house hack . And if you don't know what that is, it's when you rent out a portion of your house or if you have a duplex, you rent out another unit. And the cost of the money that you retain, that you, the money that you get from that rental helps substantially drop your housing costs, if not eliminate that.
And so I want them to be able to have at least that first house to be a house hack so they can build off of that. And take that money and buy other houses in the future. So that's how I'm going to use those college funds. That's how they're set up. Let me know in the comments [00:09:00] or, slide in my DMS.
If you have any more questions about college fund, about investing for your kids, how they should be up. Again, if you are not investing up to your company match, or if you are not maxing out your own Roth IRA, This is not a time for you to be asking about your kids. You need to get yourself right.
One of the questions my girlfriend asked was that she said her boyfriend's daughter decided not to go to college and he had a college fund and the money is just sitting there. Again, the money is not just sitting there. He can transfer it out to his name. If he has some student loans. He can pay down his student loans.
If he's paying for private school for another kid, he can use that for private school. He can designate it. Say they got married. She has a younger son. He can change the beneficiary to her son and use it. So that money is not tied up. It doesn't just disappear if your kids don't go to college.
And so that's like a misconception that people like. I invested all this money [00:10:00] and now it's just sitting there. No, you can use it for anyone. It can be a gift. You can use it for yourself. It can be a gift for another family member. You decide to go back to school. You're the beneficiary. Now you can use those funds to go back to school.
So again, it's just a legacy building tool that you can use. If you don't think your kids are going to go to college, I still say set up a 529. But it might not be your priority. So she's leaning towards more like a custodial account, which is fine. A custodial brokerage, which is fine.
Only thing that you need to consider with a custodial brokerage is you are only an owner of that account until the child turns the age of majority. So you. Put your heart, our money into this account and the age of majority in or when they technically become adults in certain states differ. So it could be 18 in 1 state, 21 and 1 in another state.
But as soon as they turn that age, it's their money. They can do whatever they want with that money. And if you haven't set them [00:11:00] up well, with good financial literacy skills, they might have that money off. And so that's the only downside to. That and, the taxation side of it that money is taxing that account, but I think the taxes are well worth the investment.
Yeah, anyway, any questions about these accounts, how to set them up, where to set them up a good place to start is fidelity because fidelity has, zero count minimums, no fees. They have no cost index funds where you don't, you're not paying fees on your index funds. And so I like to refer people to fidelity because most people are getting started, with a little bit of money and want to invest I like to say 10 dollars is like the bar if you have 10 dollars to invest for your kids, you can invest. My kids they're 529 is in Vanguard.
They're Roth IRAs are with fidelity and currently our custodial brokerage accounts is with stockpile and it's only with them because of the ease of use because,[00:12:00] my kids can like the, even my 2 year old my daughter, when she was 2, she couldn't read so she can recognize the stock symbol.
So I like to use that because they can easily point out and see what stock they want to buy without, it's not overwhelming like a regular brokerage platform, but I will roll those funds over into a fidelity account for them when they get older. So highly recommend fidelity. Anyway, again, I know I said this, but have any questions slide in my DMS, let me know if you're investing for your kids.
And then if you have any questions about mine, but yeah, my kids, his six figures.
Hey there I’m Naseema
My dream is for everyone to know that financial independence is attainable with a little intentionality. Learn how I can help you finally break the cycle of living paycheck to paycheck.
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