Submitted by lolheisdead59 t3_1001gym in personalfinance
Hey guys, got told recently that I'm about to be a father. I am wondering what financial accounts I should look into setting up, comparing. What are your experiences? What did you wish you did/could do differently?
I grew up without any financial accounts, no 529, no brokerage and got told to figure it out. It made me who I am today, but I'd like to create generational wealth for my child. Any help/advice is appreciated.
Have you already hit the max or on track to hit the max on all of your available tax advantaged space?
Have you read the Prime Directive? Have you seen the Flow Chart?
Once you've done all that...
u/billthecatt has arguably the best answer to this question linked and pasted below:
Typical kid options:
529 - Great for college/education, but not all kids go to college/private schools, etc. More Details here: https://old.reddit.com/r/personalfinance/comments/mq0rjb/information_about_college_529_savings_plans/
UTMA (Custodial) - Invest on behalf of the child, Pros - lower taxes (assuming amounts don't get too high, see below), fewer restrictions on usage than 529. Cons - Is the child's money, so no takebacks. Minor takes full control at the age of termination (varies by state, typically 18 to 21). Also, will reduce/impact financial aid for college. You should tax gain harvest this type of account (realize gains periodically, while in the 0% tax bracket).
IRA (Roth/Traditional-Custodial) - Cons: Requires earned income, which most minors don't have or have much of.
Normal investment account in your name - Cons: Probably higher taxes than UTMA, Pros - you keep control
HYSA - Pros: Won't "lose" nominal value, low risk Cons: May lose out to inflation.
CD - Pros: Like HYSA, but with guaranteed returns over investment period. Cons: May lose out to inflation.
I-Bonds: Currently high-yielding bonds that can be purchased in accounts for minors: (up to $10k/year; interest changes every 6 months) /r/personalfinance/comments/qprqpy/ibond_questions_answered/
The first 4 options (529, UTMA, IRA, investment account) are account types that allow for investing based on your time horizon. If your child is young, a more aggressive investment mix may make sense for you (Stock ETFs/funds), and you may want to shift to a more conservative mix over time, depending on your goals for your child(ren).
More information:
UTMA Kiddie Tax Info: https://www.marketwatch.com/story/the-kiddie-tax-is-getting-easier-and-maybe-cheaper-under-the-new-tax-law-2018-05-24
UTMA Taxes: In general, in 2020 the first $1,100 worth of a child's unearned income is tax-free. The next $1,100 is taxed at the child's income tax rate for 2020. Anything above $2,200, however, is taxed at the marginal tax rate of the parent(s), which usually is higher than the child's rate.
Overfunding a 529 isn't so bad: /r/financialindependence/comments/hqexle/oversaving_in_a_529_is_a_much_smaller_problem/
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Term life to protect yourself and child against you suddenly dying/losing ability to work. We're going through same. Have a 3.5mo and set up living will, trust etc to avoid contesting of assets should we kick the bucket prematurely.
Our FA told us we were way underinsured for our annual cost of living and should something happen (permanent loss of income through death or disability) we would be screwed. We have life ins via work but the payouts only like 100k which is frankly nothing over the course of expected income/finance costs over decades (funeral, mortgage, college fund etc).
We thought about setting up a 529, but think maybe a traditional investment might be better (no restrictions on what to spend on), We'll probably not put too much in a 529
Suggest talking to estate attorney as they'll have a lot of good questions that you'll want to answer around assets, distributions etc and go through some basics should something happen to you.
No, not at all. The child hasn't been born yet. Given the fact that I'm military, our taxes are relatively low due to military pay.
I've never had to worry about maxing tax advantages, which has inevitably lead to screwups on my part with short term gains on my own brokerage account. I am keenly aware that once my wife and I transition out of the service tax advantages are going to be more important.
Thank you for this post. I will go through all of these resources.
As a young guy, Ive never looked into life insurance. We get the default $400k life insurance through military service and I've honestly never thought about it. Thank you.
In your opinion, is there any specific clauses or terms I should look to include/exclude in life insurance?
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See if there is a fee only financial advisor near you who specializes in military families? Or maybe the military offers a service
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Military generally does offer these services. However, the individuals providing these services do not generally have training in personal finance as financial advisors. The individuals you normally see utilizing these services are younger service members who blow their whole paycheck on cars, alcohol, trying to live off base without the allowance.
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529s are great. People think of them as being for college only, but they can be used for so much more than that. Any qualifying program including training in a trade. And it also can pay for qualifying housing while studying and tools needed to study... like a laptop. Or if the kid goes into a trade, it can pay for all the tools they'll need to get started.
We also separately have a smaller irrevocable trust so that he can use it to have a downpayment on a home or some other major milestone when he's 30. They can get up to 15k a year avoiding gift taxes and exempt from estate tax.
In your experience, how expensive/involved is the process to establish a trust? Can I continually contribute to the trust?
I have done some research on trusts, but nobody in my family has any experience with such things. Thank you for your post!
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Our FA suggested Pacific Life, and it came out to like $50/mo 20yr term for $1mil payout (not taxable) for me, my wife was slightly higher. Your rate is also based on your health, so if you'd sign up earlier, you could be preferred rate, obese or worse and it affects your rate.
You could probably shop around for that. As far as specific clauses i'm not too sure, have only just started looking more into it to protect each other, and also be secure for our child's future.
Basically we're been very fortunate (and lucky) in that we have been able to save very aggressively before talking with an FA and he said we're pretty set, BUT people who are pretty secure he "throws grenades" at our plan to see how protected we are. IE one of us dies, permanent disability can't work as the extremes, and that opened our eyes about if everything's gravy we have nothing to worry about, but still some things could completely derail our plans.
Also don't go to just any FA, make sure they're a fiduciary financial advisor so they have a legal obligation to act in best interest of their clients
we went to estate attorney (Colorado) and it was a flat $1500 I believe. We have "a lot of assets" for our age so that may have made it more expensive as it wasn't completely boiler plate.
This was for living will, trust, power of attorneys (financial and medical), guardianship (should we both kick the bucket) etc.
We’ve got a far policy through Navy Mutual in addition to our SGLI. I was advised to get 10x your annual income. I figure that if I kick the bucket early, my family will be set for the next decade OR have 10 years to get their shit together financially.
> maxing tax advantages
any retirement/investment account that gives a tax advantage has a yearly contribution limit
so when they ask if you have maxed your tax advantaged space they mean have you put $20,500 in your 401k (TSP), $6,000 in a Roth IRA, $3850 in a HSA, $8000 in a 529, etc.
paying low to no taxes now isn't relevant, its the account that provides tax advantages now or in the future or both, regardless of your current tax situation
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