Where to put this money for my child?

April 19, 2015 5:06 PM

A relative wants to give a cash gift to my 12-year-old child, but wants to put it in some kind of account where it can grow for many years before the child receives it. Where? How? It's under $1000 and we're in the U.S.

What are the options if we specifically want this money for college (in theory, only 7 years from now)? Or, what are the options if we want him to have this money much later? Like, what if it was in a retirement account for him? Are there tax implications? For all intents and purposes, child currently has zero income and doesn't have any tax obligations.

(Child already has a 529 college savings account, which a different relative has established. This new money can't go into that account because reasons.)

posted by BlahLaLa to Work & Money (12 answers total)

Why not just setup a new 529? There's no limit.
posted by miasma at 5:10 PM on April 19, 2015

Response by poster: Just to clarify: we are not opposed to setting up at new 529 if that is the smartest thing to do.
posted by BlahLaLa at 5:11 PM on April 19, 2015

When I was a kid, various elderly relatives did this for me via savings bonds. It's pretty much the lowest rate of return you could possibly earn on the money, but that's because it's also extremely safe.
posted by Bardolph at 5:18 PM on April 19, 2015 [2 favorites]

For what it's worth, if someone gives your child a gift, that does not count as income for the child. The giver has a tax burden only if that gift is over $14k/year.

529 plans are automatically adjusted for risk as the child gets closer to college age, and if the funds are used for qualifying higher education costs, the earnings are not taxable. It's hard to beat. Or you could just put it in a savings account or something.
posted by bedhead at 5:34 PM on April 19, 2015 [1 favorite]

Best answer: My stepmother put $500 into some American Funds for each of my kids around 20 years ago. Their accounts are worth over $5,000 each today. They both rolled it over into IRAs for retirement purposes where it could grow to $50,000+ before they touch it. If you do something similar, choose for example a Fidelity 60/40 balanced fund, as a retirement account, in 60 years that $1,000 could become $100,000 or more. Don't do savings bond unless you like lending money to the government for next to zero interest rates.
posted by beagle at 5:43 PM on April 19, 2015 [4 favorites]

Best answer: My folks threw a few thousand bucks in a mutual fund linked to the dow for me back in 1995. It roughly tripled in value by 2013 when I cashed it in to use as part of a down payment on my house. Be careful investing, but there are nifty products out there if you want steady growth for many years.
posted by vrakatar at 6:03 PM on April 19, 2015

You probably want to ask a financial advisor, but I believe you cannot contribute to a tax-advantaged retirement account in the USA unless you have an income (i.e. your child cannot have one until they have a job).

Savings bonds would probably be the safest, since college isn't that far off, but if you have slightly higher risk tolerance an index fund is generally a solid investment without undue risk for that kind of a horizon.

The benefit of a 529 over just directly putting it in an investment is that it's tax advantaged for the person contributing in a lot of cases (can deduct from state income tax) and that the investment grows tax deferred. If you invest directly into index funds without using a 529 plan, it won't grow tax deferred. This isn't as huge of a deal when you're only talking about 7 years timeline.
posted by treehorn+bunny at 6:04 PM on April 19, 2015

You can open a 529 at Vanguard online. Looks like they have some good plans, and Vanguard has very low fees. Normally I'm a conservative investor but in this case because it's (a) less than $1000 and (b) around a five year time horizon I would put half to 2/3rds in a total stock market fund.
posted by mono blanco at 7:46 PM on April 19, 2015

I did have a friend who was dismayed at how much the 529 plan she had saved up counted against her daughter's favor in terms of financial aid. Definitely talk to a financial advisor about 529s and whether a ROTH might be a better spot for that money.
posted by amanda at 8:57 PM on April 19, 2015 [1 favorite]

529, as mentioned, is a good option. Another choice is to open a UTMA account. It's a taxable account, but kid can't get it until 21 except at discretion of the custodian (which would probably be you)
posted by jpe at 4:51 AM on April 20, 2015

BTW, you can open a UTMA at Vanguard, invest cash in an S&P 500 index, and just let it go.
posted by jpe at 4:52 AM on April 20, 2015

Interest on savings bonds is tax free if you use the bonds to pay for college expenses.
posted by Midnight Skulker at 8:37 AM on April 20, 2015