What's the best way to save for the new baby in my life?
August 11, 2015 5:29 PM Subscribe
I have a new baby family member -- my first! hooray! -- and I'd like to put some money into savings for him. What's the best way to do this?
Here's what I want:
* an account into which I can direct deposit a portion of my paycheck each pay period
* that I can then give to him when he's 18 or 20 or 21 or whatever I decide (I'm not trying to be fickle; it's just that he's a baby right now, so I don't even know!)
* that he can use for whatever he wants, whether college or travel or a down payment or who even knows what
* that if his parents have another kid(s), I can contribute more to and split the total between them evenly
* that won't interfere with his eligibility for need-based financial aid
What's the best way to do this?
Here's what I want:
* an account into which I can direct deposit a portion of my paycheck each pay period
* that I can then give to him when he's 18 or 20 or 21 or whatever I decide (I'm not trying to be fickle; it's just that he's a baby right now, so I don't even know!)
* that he can use for whatever he wants, whether college or travel or a down payment or who even knows what
* that if his parents have another kid(s), I can contribute more to and split the total between them evenly
* that won't interfere with his eligibility for need-based financial aid
What's the best way to do this?
The tough part is the last point: I don't know of an easy way to give a gift like this without affecting need-based financial aid. If this is a strict requirement, you can start contributing to a Roth IRA as soon as he starts working (assuming he gets a job in high school or doesn't go to college immediately) - you can't contribute more in a year than he has as "earned income." This is money that you could gift at any time and which won't (under current rules) be counted when they're calculating financial aid, but he can still withdraw contributions for any purpose, including tuition. Any money you accumulate in a non-IRA account before he is of working age will have to be given in his last year of college or later in order to avoid affecting his aid.
Otherwise, I agree with pando11 about setting up direct deposit into a regular Vanguard account. If you know approximately when you'll give it to him, you can put it in a Target Retirement Fund 2035 (or whatever year you think he might need it). Don't be put off by the word "retirement" in the name; these are good funds for anyone who wants money to grow but also be available to withdraw at some point down the road. This isn't the absolutely most tax efficient way to go about things, but unless you're in a very high tax bracket or contributing very large amounts, the effect will probably be fairly insignificant - just remember to keep a little back to pay taxes on any dividends the account has received throughout the year.
posted by exutima at 7:50 PM on August 11, 2015 [1 favorite]
Otherwise, I agree with pando11 about setting up direct deposit into a regular Vanguard account. If you know approximately when you'll give it to him, you can put it in a Target Retirement Fund 2035 (or whatever year you think he might need it). Don't be put off by the word "retirement" in the name; these are good funds for anyone who wants money to grow but also be available to withdraw at some point down the road. This isn't the absolutely most tax efficient way to go about things, but unless you're in a very high tax bracket or contributing very large amounts, the effect will probably be fairly insignificant - just remember to keep a little back to pay taxes on any dividends the account has received throughout the year.
posted by exutima at 7:50 PM on August 11, 2015 [1 favorite]
I agree with Vanguard mutual funds for storing the money for the next however many years. One way to get around the financial aid requirement might be to gift it upon graduation (which he could then use to pay off any loans he accumulates during his education) or to provide tangible/intangible gifts that are not money (such as plane tickets, hostel reservations, etc for travel). If you gift the money for a down payment on real estate, it will have to be disclosed to the lender, although it likely won't affect much.
posted by peanut_mcgillicuty at 8:23 PM on August 11, 2015 [1 favorite]
posted by peanut_mcgillicuty at 8:23 PM on August 11, 2015 [1 favorite]
If you want to keep control of the money - for example being able to split it among multiple kids in the future or to wait and see when the timing of the gift would be best then the best is to set up a separate account in your own name and then gift the money to the kid when you are ready. This will also let you give the gift in a way that is useful, meaningful and doesn't cause financial aid problem.
From a tax perspective, it means that you will be paying tax on the earnings at your rate, not the kids (although if there is enough earnings the kid pays tax at the parents rate for many years). Also, again depending on the amounts, when you actually give the gift, if it is over a set amount ($14,000 per person per year) it may have tax consequences (although not unless you die rich).
I mention taxes but I think this is a case where you don't make taxes drive your decision - leaving in an account under your control gives you the flexibility that will let you achieve your real goals - not just maximizing the dollars in the account but letting you keep to your vision about what the money is for.
posted by metahawk at 9:09 PM on August 11, 2015 [1 favorite]
From a tax perspective, it means that you will be paying tax on the earnings at your rate, not the kids (although if there is enough earnings the kid pays tax at the parents rate for many years). Also, again depending on the amounts, when you actually give the gift, if it is over a set amount ($14,000 per person per year) it may have tax consequences (although not unless you die rich).
I mention taxes but I think this is a case where you don't make taxes drive your decision - leaving in an account under your control gives you the flexibility that will let you achieve your real goals - not just maximizing the dollars in the account but letting you keep to your vision about what the money is for.
posted by metahawk at 9:09 PM on August 11, 2015 [1 favorite]
Pay off your own debts first. Don't make him financially support you. Then save for him.
posted by gorcha at 11:18 PM on August 11, 2015
posted by gorcha at 11:18 PM on August 11, 2015
I think there's nothing wrong with giving the money after college. I received a substantial sum from my grandparents after I graduated from college, with the intent of its being whatever kind of safety net or nest egg I needed, and between compound interest and my saving, it's grown quite a bit. The money was important, but also important was having this investment account in my name, at a time when I wouldn't necessarily have known how to get started having an investment account, that made it very easy for me to just start putting long-term savings into.
posted by telepanda at 6:59 AM on August 12, 2015
posted by telepanda at 6:59 AM on August 12, 2015
There are college savings plans that have a number of useful features. If you can do a direct deposit from your paycheck this may be the best and easiest way to set aside money for your child.
In a college savings plan the earnings are tax deferred. When you pay for covered college expenses the earnings are tax free. The plan should have an investment scheme that places the funds in aggressive investment funds to begin with, and graduate to more conservative funds as the child's age nears 18.
If the child does not go to college, or is fortunate to receive a full scholarship, the funds in the account belong to them, and they will pay taxes on the income.
This scheme worked our well for us, as we have over two years of college tuition saved up, with the freshman year starting this month.
posted by Midnight Skulker at 9:04 AM on August 12, 2015
In a college savings plan the earnings are tax deferred. When you pay for covered college expenses the earnings are tax free. The plan should have an investment scheme that places the funds in aggressive investment funds to begin with, and graduate to more conservative funds as the child's age nears 18.
If the child does not go to college, or is fortunate to receive a full scholarship, the funds in the account belong to them, and they will pay taxes on the income.
This scheme worked our well for us, as we have over two years of college tuition saved up, with the freshman year starting this month.
posted by Midnight Skulker at 9:04 AM on August 12, 2015
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I can't recommend any mutual funds because I am not a financial expert. I would talk to a representative or use this tool to figure out which is best for your profile. I would lean more stocks and less bonds for more risk tolerance and higher growth over time.
*I am not an advisor and anything I say is not a personal recommendation for you - these are just strategies that have worked for me*
posted by pando11 at 6:04 PM on August 11, 2015