Savings accounts for niece/nephew - IRA or 529?

[picaflora]

H and I have one niece (9yrs old) and one nephew (3yrs old).  Their grandparents spoil the crap out of them, so for holidays/birthdays they want for nothing.  We have decided that instead of physical gifts, we'd like to contribute to an account for them for when they are older.

We don't want to set restrictions on the spend.  It's just something to help get them set up later in life - be it a house down payment, for schooling, car, etc.  It will most likely be turned over to them on their 18th birthdays (unless their parents request we wait for some reason).  If the parents want to restrict the use, that's fine with us as well.

To maximize growth, I'd like to invest the contributions in the market instead of just a savings account.  Any suggestions on the best option?  All I can think of is an IRA or 529, but should I look into something like a trust?  We also haven't decided if we're going to contribute more to the 10yr old to try to keep the ending amounts close to even, but that's not something we need to figure out right away.  

It's not likely either kid will have money saved for college - but there's also no guarantee they'll go that route.  I also don't expect the contributions to be large each year, but that may just depend.

H and I don't have kids of our own, and at this point its not likely that we will. 

[Poppy]

I don't think they can have an IRA until they have "earned income".

I think a 529 is a good option and there are some ways you can move things around if they end up not going to college. But you could also just keep a brokerage account in your name but earmarked for them. I don't know what kind of amount you're imagining but if it's quite low you may run into minimum investment problems and if it's quite high you might want to look at something more formal (trust, ugma, etc).

[jlt19]

I have a 529, Roths, and a brokerage account for each of my kids. The first two are in their names/SS#'s but with me and DH as the trustees. Fidelity has custodial IRA's, and yes, it's supposed to be earned income. However, filing tax returns on mandated unless one makes $6,000/year (I think), so do with that information what you will.

The brokerage account is in DH and I's names, but I just have it earmarked for them basically. The only negative I see there, is that we also pay the capital gains on the dividends, but since I have them reinvested, it's not much.

I did want to buy a piece of Apple stock for each of my nieces/nephews somehow when it split ($100/share), and then give that to them when they graduate HS. But I couldn't figure out an easy enough way to do it w/o getting hit with the gains if and when they sold.

[AdaraMarie]

I don't know much about these things, but I do know that 529 distributions for college that come from accounts not owned by the parents count worse against financial aid than from an account owned by the parents. So if you want to fund a 529 it would be better for the kids if their parents set it up and then you deposit into it.

[picaflora]

Thanks for the thoughts! I didn't realize 529s from other family members counted more against financial aid. That definitely makes sense though! I think I may go the brokerage route, and most likely pay the capital gains taxes ourselves and gift the proceeds when it's time (over multiple years if needed).

Amount-wise, our thinking is yearly contributions would be between $1-2k for each kid.

[purplepenguin7]

This is very sweet and generous of you! My parents opened me a UGMA custodial brokerage account when I was a child and I still have it. I will have to pay capital gains on it, when I decide to use to, but still that will be a small amount in relation to the total. I am pretty sure it didn't play into my financial aid packages when I went to college. I would probably explore that route, unless you can have their parents open a 529 and you can add to it. They can send you a direct gift link and you can add to each account whenever you'd like. The only downside to that would be if you don't trust the parents to properly manage the account (this would be the case in my family).

[minzy]

I know you’re looking more for investment type stuff but savings bonds could work, too. It would give them flexibility on the timing of the spend and they could spend it on whatever (they will have to pay taxes on the interest when they cash them in, but it shouldn’t be too bad). My grandparents used to buy them for us and I remember cashing some in during school. I advocated (albeit unsuccessfully) for those for nieces and nephews for a long time, now we usually just give our siblings straight cash for the kids.

[trissie18]

Feb 15, 2021 21:39:00 GMT -5 AdaraMarie said:

I don't know much about these things, but I do know that 529 distributions for college that come from accounts not owned by the parents count worse against financial aid than from an account owned by the parents. So if you want to fund a 529 it would be better for the kids if their parents set it up and then you deposit into it.

Did this change in recent years? It used to be the other way around which is why our DSs 529s are in my mothers name so they wouldn't be counted at all against financial aid unless they paid out while they were in college (but this applies to any payout regardless of who owns the account). Our plan is to hold them until they graduate then use them to pay the student loans to avoid the negative impact. We explained this to our financial advisor last month and he agreed it was still a good plan. Maybe we need to rethink this?

[AdaraMarie]

trissie18 Well, I have only researched this a little because I just set up accounts for my kids last month (so late, but better than never).
So, I think the way that it works is that the amount in the parents have in the account affects aid some because it is an asset, which I think is fair because it is. But if someone else owns the account it isn't reported as an asset, but the next year it is reported as income for the student which is weighted a lot more heavily in aid calculations than parental assets.

Here is the first article I found when I was trying to jog my memory:

www.savingforcollege.com/article/yes-your-529-plan-will-affect-financial-aid

[trissie18]

Feb 16, 2021 12:34:03 GMT -5 AdaraMarie said:

The payout being counted as income is our understanding as well which is why we plan to use it to pay off the student loans afterwards (and probably the last year's tuition when it no longer matters) to avoid the penalty. In the end it may be a moot point because as our financial advisor stated the amount of financial aid our DSs are likely to receive will be really low if any anyway based on our projected income so we may change course when it gets closer depending on how much is in the 529s by then.