616 | How Should You Give Money to Your Kids? | 529s, UTMAs, Trump Accounts & More

22:43Cody Garrett:This is really interesting because it's from each person to each recipient is that$19 ,000. So for instance, let's say you were married and you had a son who had a spouse. You could give$19 ,000 to your son. You could give$19 ,000 to your daughter-in-law. Your spouse could give$19 ,000 to your son and give$19 ,000 to the daughter-in-law. So that's$76 ,000 in that particular instance, totally gift tax free, no issues whatsoever. Even if you went over that, like Sean just said, it's actually just a reporting issue because you have that$15 million lifetime exclusion, which is an estate and gift tax exclusion.

23:24Cody Garrett:So the way that I think about it, Sean's head is going to explode. I think about this, like I have a scratch pad on the wall. I've got 15 million. And then if I went over by 3000, I just do parentheses negative$3 ,000 and then I subtract. And that's now my current gift tax limit. So I'm at 14 million, 997, whatever. You obviously have to file this, et cetera, but it just becomes a filing issue. It doesn't, there's no actual tax. I think it's important that people understand just the framework of how this works.

23:52Brad Barrett:I'm just glad that Sean gave every person in the audience 19 ,000. So look under your chair, everybody.

23:58Cody Garrett:Thank you, Mr. Mulaney. I like it. All right, gentlemen. So I think we're probably ready to move on to the mechanics.

24:05Brad Barrett:Yeah, let's go into the mechanics.

24:06Cody Garrett:All right. Take it away.

24:07Brad Barrett:I'll go ahead and talk about one of those big motivations in terms of the struggle, avoiding student loan debt. A lot of us get excited about the opportunity of tax-free growth, specifically for qualified education expenses. So if you do already plan to help your child pay for college or other education expenses, including, by the way, tuition, fees, room and board supplies, that computer, that first computer in college, et cetera. The 529 has become the most popular education savings vehicle. So again, the big benefit of these accounts specifically is that the growth of the account, by the way, when you put money in, it's an after-tax contribution from the federal level.

24:47Brad Barrett:You may or may not receive a deduction or a credit on the state level, but just thinking federally here, you're making an after-tax non-deductible contribution to this account. By the way, there's a single owner and a single beneficiary at a time, but you can transfer account ownership and beneficiaries. You can change vertically and horizontally. So for example, if I had one, I could change the beneficiary from me to my sister, or I could move it up or down to my parents or to my kids. Even though it's a single owner, single beneficiary at a time, you can change that moving forward. But those investments will grow tax deferred, just like they are in a retirement account in a way.

25:24Brad Barrett:But the withdrawals of the growth is tax free when used to pay for those qualified education expenses. By the way, that also includes like K through 12, like private education. That's now actually increased with the One Big Beautiful Bill Act from 10 ,000 a year to 20 ,000 a year. I think that's per child. And they've also added additional benefit of you can also use 529 growth tax free to pay for professional credentials and continuing education. So over time, they've been adding extras, things that you can use this money for. It makes me wonder if my newborn daughter, Gracie, she was just born 18 years from now, like what does education look like?

26:00Brad Barrett:So when I put money into a 529 for her today, if we do like simply have a YouTube university in 18 years, could her 529 pay for YouTube premium? I don't know. But for now, just keep in mind that there's a whole list of qualified education expenses. One thing that Sean mentioned earlier, I think it was, yeah, objection number two, destruction of option value. This is what we call a restricted use asset. Because it's specifically for paying for qualified education, what happens if you take growth out of that 529 that's not used for qualified education? One is it's going to be subject to ordinary income tax.

26:37Brad Barrett:And there's also a 10 % penalty, we call that an additional tax, for the withdrawal of earnings not used for those qualified education expenses. So yes, you get a great benefit if you use that money for those education expenses. But if you don't end up needing that money, maybe they choose a different route other than Sean mentioned, like generally the US education system. Maybe they join the military. Maybe they receive a scholarship. One key thing here, there is some funny flexibility with a 529. There's one example there is if they do receive a scholarship, you can actually take out that amount from the 529 that year pay taxes on the growth, but without the 10 % penalty, assuming that it was up to the amount of the scholarship.

27:18Brad Barrett:So ultimately, I want to show here, again, we can't talk about every detail of these accounts today, but just know that there is restricted use and what that growth can be used for tax-free, but also know there's flexibility, not only in terms of receiving the scholarship, but also, like I mentioned, there's unused funds that you don't, maybe they choose a different route or receive scholarships. There's unused funds in the 529. Some people call this like a dynasty, 529, that those unused funds can typically be used to be transferred. The beneficiary can be changed to a future or another future family member.

27:49Brad Barrett:For example, I might open one for Gracie today. She was just born. Maybe I put a few thousand bucks in. Maybe she doesn't need the money or doesn't use all the money. In the future, I could change the ownership to my daughter, Gracie. Again, she'll be adult at that point. And she could change the beneficiary maybe to her future child. And again, we understand the power of compound interest and choose fi potentially again you have to be very careful again about like you know why you're putting money into these these motivations but overfunding a 529 you can be a problem if you're thinking about the restrictions but it can also become flexible if you have multiple children or you're assuming this will be a multi-generational way to pay for education and i call this the kind of the financial family tree i have a friend by the way who's a very famous family and they've already covered the next 10 generations of education with their 529 planning.

28:38Brad Barrett:Again, most of us aren't trying to build a dynasty here with our education, but that's one potential flexibility. If you don't use it for yourself or for your kids, it could potentially be used for those future generations. Sean, what do you have to add to that? Yeah. So a couple of thoughts on that. I look at it from a profile perspective. When does the 529 sort of make sense from a profile perspective? I start with the parents of a newborn. In most cases, you think about 28-year-old couple, 32-year-old couple, they just had their first child, I think it makes very little sense, right? That couple needs financial flexibility, the taxes on investment income for them very low.

29:16I think the profile for them, the people it gets most hyped to, it's the worst profile for the 529. When can the profile make a little more sense? I think it's later in life, kids and parents. So let's get the kid out to 14, 15, 16 years old. We know their high school grades, or at least their freshman, sophomore more year grades. We sort of know their plans. We know mom and dad's finances a lot better. Then maybe the 529 can make more sense. What about maybe grandparents where the wealth is just very, very high? Maybe then it can make more sense. Another one is, and you're going to have to look at each state.

29:52My understanding about the state of South Carolina for their state income tax, not federal state, they don't allow a deduction for college payments. So if mom and dad just pay the college, there's no tax deduction. That's my understanding. You got to verify that. My understanding is for their state to income tax return, there's an unlimited deduction for 529 contributions. So what this sets up for South Carolina parents potentially is just route everything through the 529. Okay. In the summer, we fund the 529 and then in the fall, we pay the college tuition through the 529. So it's like a play like that.

30:28I would argue that overfunding 529s does not make a lot of sense for a number of reasons. One, it's now use restricted multi-generationally. I don't like that. I think that's a problem, not a feature. And then two, there are bailout tactics when we have an overfunded 529. That exists in the world. The best bailout tactic, in my opinion, is to find an interfamily additional beneficiary. So you could change the beneficiary, no problem. So maybe it's a sibling, maybe it's a third generation. I like changing beneficiaries. One thing that happened was a few years ago, they passed this thing where you could do a 529 to Roth IRA transfer.

31:08The personal finance commentary got way over its skis on this thing. This thing should be viewed as a very limited bailout tactic, not as something to be planned into. But if you do have the overfunded 529, great, do it, but understand how minimal it is. And remember, mom and dad don't need to do this to fund 20-somethings Roth IRA. They just need a checking account to fund a 20-something, 30-somethings Roth IRA. And then the states, my understanding is California, Indiana, and other states don't recognize that 529 to Roth IRA rollover thing. So it creates a little bit of state income tax, not a big deal, but just something to keep in mind.

31:50In the right profile, which I think is really limited, the 529 can be great. But for the profiles, it tends to be the most pitched to, it tends to be the least optimal for.

32:02Cody Garrett:That is very interesting. So the 529 to Roth IRA, Sean, is that limited largely because it doesn't give you additional annual limits? is it's still subject to it. You hit it, Brad. You absolutely hit it. Part of the problem with the 529 to Roth IRA rollover tactic is it creates no additional Roth IRA runway, no additional limitation. That's why I said, if mom and dad, the child is 25 years old, and they just started their first job as a second grade teacher, and so they don't have a lot of free cash flow. So mom and dad want to fund an annual Roth IRA contribution for that child. That's great.

32:42All they need is their own checkbook to do that. This didn't become the only way to do it. This didn't create like a second Roth IRA contribution. If mom and dad take the overfunded 529, direct the 7 ,500 to the daughter's Roth IRA because she's a second grade teacher, that's great. And then that's it. The daughter now can't make her own annual contribution to a Roth IRA. And by the way, it's only for$35 ,000 lifetime, plus it's only for this year's annual contribution limit. So you could see why it may not be the greatest thing ever. It doesn't create additional Roth IRA limitation. It's capped at$35 ,000.

33:23And oh, by the way, some of the states don't recognize it creating a minor state tax issue. No big deal on that. When this first got passed, people started thinking, oh, I got to fund my 529 so I could fund my Roth IRA. I said, all you need to fund a Roth IRA is a checkbook. And this didn't create additional limit to take advantage of.

33:41Cody Garrett:If somebody wanted to paint like the bull case for putting money into a 529, what are the actual benefits, if any? The bull case for the 529 is mom and dad are already very financially successful and already paying a lot of taxes on their investment income. and they have a really good idea that the kid's going to use the money for college expenses. That's the bull case. So that could be for grandparents. That could be for very financially successful parents of teenagers who have some academic success and they just know they're going to Stanford, they're going to Harvard and it's going to be 70 ,000 plus a year.

34:17Goodness only knows. And then why don't we take some money and maybe get some state tax benefits and get some of that interest income off our tax return. To my mind, that's the bull case. But Cody, I'd be interested in your thoughts on that.

34:30Brad Barrett:Yeah. So I think it's just the power of the compounding interest. So this idea that, hey, maybe I can put in, for example, like my wife and I have done this. Well, maybe we'll talk about this hybrid strategy. When our daughter, Gracie, was born, we looked at, hey, like what's the cost of one year of college today? Right. And what we effectively did is say like, what's, you know, kind of, we have to make assumptions about what that college might be. And again, we don't know if she will, but we understood the restriction, but we also understood, hey, we want flexibility. So what we did is we said, okay, what does one year of college cost at that college?

34:58Brad Barrett:And then we divide by two, right? We put half of it into a 529 and half of it into a taxable brokerage account in our names, the parents' names, not the kid's name, not a custodial account. And what that might mean is say, hey, maybe I effectively put one semester's worth in today's dollars into that account. And let's say it grows at seven, 8 % over the next 18 years. Again, assuming that I choose an investment that's aligned with that type of desired outcome from a dot dot dot. But, you know, maybe I put one semester's worth in today and in 18 years, maybe that's worth two, three, four, five semesters worth of college.

35:30Brad Barrett:You know, the motivation is that tax free growth for the qualified education is that some people are putting in, you know, one year's worth of college and getting two to three years out because of the compound interest.

35:40Cody Garrett:For me, there was a minimal state tax benefit. and that is kind of how I looked at this was, okay, I'm just kind of putting money aside. I'm getting this state tax benefit. It's not that significant, but it's something. But yeah, in terms of ordering rules on where to put money, 529s was never very high on my list. One thing that has always been interesting to me, and now I actually have a rising college freshman, the FAFSA and other, like CSS profile, et cetera. This kind of gets back to something, Sean, you said earlier, which is if I kept it in my kid's name. Now, that is an interesting phrase, and maybe we could dive more into the specifics of that.

36:24Cody Garrett:But just in terms of the ramifications for the FAFSA, which for anybody who doesn't know is basically the federal forum that decides essentially how much aid, financial aid and your expected family contribution, etc. So So there are different percentages that are applied, certainly like for your income, kids' income, et cetera, but also for your assets. And last I checked, it was something like parents' assets get kind of reflected at 5%, whereas the kids' assets get hit at basically 50%. So clearly this is not a tax, but I always use the phrase as a mental framework of your kids' assets are taxed for college, basically, at 50 % if you happen to have those assets in their name.

37:10Cody Garrett:So there are massive ramifications for this, guys. So I'd love to hear just a little flavor of this.

37:15Brad Barrett:Yeah, I think it really comes down to assets versus income. So a parent-owned asset on the FAFSA, up to 5.64%, funny number, right? Up to 5.64 % of that asset is deemed available toward the expected family contribution, that EFC. If it's an asset owned by the child, it's up to 20 % that's factored into the financial aid calculation. So the difference between about 5 % versus 20 % from an asset perspective, I think where the 50 % comes in, Brad, is the income of the child. So there's the asset of the child and the income of the child. By the way, the 529 doesn't have like its own special, the 529 that's owned by the parents, that's just viewed as an asset of the parent, just like the parents, taxable brokerage accounts, checking savings accounts.

37:58Brad Barrett:So yeah, anytime you have put money into the actual child's name as a custodial account, like an upma, we might talk about that asset of the child. Again, you may or may not be looking at financial aid to begin with if you have enough money to be packing all this extra into your kid's name. But just keep in mind that the asset of the child is much more heavily weighted toward the expected family contribution.

38:19Cody Garrett:Okay, that's good to know. And I appreciate the clarification on that 20%. But still, I was directionally accurate in that it's student assets are assessed at essentially 3.5x what parents' assets are. I think we covered 529s pretty sufficiently here. The next set of accounts are these new Trump accounts. Sean, you want to lead us through this? Yeah. So this came in in the 2025 tax bill. They set up what's essentially a retirement account for children. The first special opportunity there is if the child was born in 2025, 2026, 2027, or 2028, the federal government is seeding that Trump account with a$1 ,000 contribution.

39:04So they're entitled to it for that account. And that is very interesting. And obviously that could grow over many years to a significant amount. These things are required to be funded in a domestic equity index fund. We'll come back to how they're invested in the second. For those children who are under 18, up to$5 ,000 could be contributed annually to the Trump account. It functions like a traditional IRA, but there's no tax deduction. So if parents are making contributions, the kid gets basis in the IRA, which is a little funky. It's like a form 8606 for those of you who are familiar with non-deductible IRA contributions.

39:44There are going to be some charitable organizations seeding these accounts as well. And it might be that a child, because they live in a certain zip code, is entitled to say$250 from the Michael Dell Foundation or something like that for their Trump account. So that's all very interesting. And there's sort of two decisions I think that need to be made with respect to kids. One is de-open the account, right? That's the first thing. And then two, is do you fund the account? And they are distinct decisions because you might just open the account just to get the$1 ,000 because the kid was born this year.

40:21Or you might just open the account because you know we live in a certain zip code and a charitable organization or potentially a parent employer is going to seed it, right? So that's one decision that you might want to think about making. The second decision might be, do I fund the account? I might open it just because I want the seed money, great. Or I might not open it. Okay, then you don't fund it. But I might open it and fund it to some degree. And right now it's up to$5 ,000 a year with no deduction. The Trump account becomes this sort of interesting animal age 18. It essentially becomes a traditional IRA that in theory could be Roth converted in part or in whole in the late teens or early 20s of the kid.

41:04And maybe you don't have that much income. So that's going to be an interesting play. My own take on the Trump account is it suffers from the three objections I raised earlier, plus a fourth. One of the issues with the Trump account is right now it's only offered through one provider. My understanding is it's a combination of Robinhood and BNY. The issue with only one provider is that it is only one provider. In a way, 529s, we have 50 states that offer 529s. I think DC also offers a 529. You want to do a Roth IRA or a traditional IRA or a brokerage account. There are dozens of financial institutions.

41:42So do I knew anything about the data integrity, say, or the account integrity of any of those organizations? No. But I know they're in the free market. They're competing with each other. So that gives me just a little bit of confidence. Well, wait a minute. They're probably doing something to get the account integrity, the data integrity decent just because there's rivals down the street versus the Trump account. There's no real rival down the street, and they're so new. So if I were a parent or a grandparent or anybody, I'd be taking a very conservative approach right now with these Trump accounts as I think more and more about them.

42:17I'd sort of wait to see where the dust settles. That said, it's very hard for me to say, well, don't take$1 ,000 of free seed money. Opening the account for somebody born in the last – from 25 to 28, that strikes me as one decision. but funding it for your 12 year old for$5 ,000, that strikes me as a very different decision with very different benefits potentially.

42:41Cody Garrett:Yeah, that certainly makes sense. It seems like a slam dunk, right? $1 ,000. Some people obviously have an issue with the name of these accounts, but if we can just be adults and put the name aside, there's a lot of things that most people in the FI community would be pretty happy with conceptually about these accounts. This low cost index funds. These are portable accounts. These are things that kids can get starting at birth. I look at this like, okay, this is actually a step in the right direction. I'm pretty happy with this. But that's a very different situation from does this make sense to do, which is what Sean so aptly just said, right?

43:19Cody Garrett:Like if your kid was born in 2024 or prior, what's the benefit? And I guess, Cody, I know Sean just went through this, but it's convoluted. what's the succinct, okay, my kid was born in 2012. Why should I put up to$5 ,000 in here? What is it actually going to get them? Are there tax deductions? What happens when they turn 18? Just give me the quick overview of that.

43:42Brad Barrett:A big part of this is kind of like it's forced. There's control. So not only can you not take the money out between zero and 18, but you also can't change the investment, which I think within the FI community, we're like, that's a good thing. I think they say, you know, investing is like a bar of soap. the more you touch it, the less there is. I think being forced to invest for potentially up to 18 years in an S &P 500 index isn't the worst option within our community. I think one thing that's funny is I just typed in a financial calculator, what if you just got the$1 ,000 pilot program contribution because your kid was born between 2025, 2028, and that money not only was sat in there between zero and 18, but sat and grew until your child's age 60.

44:23Brad Barrett:Again, we don't even know with, you know, that's a long time from now, right? But over 60 years, like that effectively that thousand dollars compounding at 8 % annualized growth, which isn't too aggressive as an assumption there that would grow to a hundred, about a hundred thousand dollars. You know, again, you do your 4 % rule. It's like, Hey, like they got a four to$5 ,000 extra year in retirement funding, like great thousand dollar pilot program. Some people are getting excited about the idea of funding it even more than that. Not necessarily for their kids' retirement, but saying, Hey, well, once they turn 18, once it becomes like a traditional IRA, it has some basis and stuff, maybe they could do Roth conversions and maybe they could convert that to Roth when they have no income or very low income.

45:04Brad Barrett:And I first kind of have to stop at that assumption because a lot of people are assuming, hey, well, once my kid's 18, let's say like, you know, they're going to college, they can just convert that money to Roth tax-free. Unfortunately, a child can still be, there's fortunately and unfortunately, the child can still be a qualifying child and a tax dependent through their bachelor's degree. So if that child, let's say that they're going to college and they have this traditional IRA in a way that's been funded not only by government, but also maybe their parents have been putting in the up to 5 ,000 a year for them.

45:36Brad Barrett:Let's say they want to convert this to Roth because they have no income. Well, because they're still a tax dependent, that Roth conversion is unearned income, which any amount over$2 ,700 of unearned income for a child as a dependent would effectively be taxed at the parent's tax rate. So I think there is some potential, especially for the pilot program contribution to grow long-term. But the idea of contributing extra to it for your child to potentially convert that to Roth, if you're thinking about the Roth conversion, think about it really starting the year after they graduate from their bachelor's degree.

46:10Brad Barrett:So maybe they get that first job. Maybe they are in like the 10%, 12 % bracket. They're going to be in, by the way, they're probably going to be a single taxpayer as well. So just keep in mind that the kind of opportunity cost of this, it's not just a potential to do a big fat tax-free Roth conversion when the kid gets to college. Yeah. And I'll just add to that. It's like, what's the right profile here? I think one, it's the seed contribution. Assuming, I mean, I'm not here to say you must do this, but there's a pretty good use case for the child was born in 25, 26, 27, or 28, open it to get the seed contribution.

46:44That's the number one use case. I would argue from there, the number two use case is very affluent parents with teenagers. So the tactic would be something like, okay, the kid is 14, 15, 16, 17, those four years, three years, or those two years. So you fund it just for those years. Okay. So that's 10 ,000, 15 ,000, 20 ,000 funding. Then you get the kid to 18 and above. And then your basis in that sort of Trump account would be, it depends on how the market's doing those four years. But maybe those are four years that are sort of meh. So maybe the growth wouldn't be that bad. Maybe you do a Roth conversion on the 10, 15, 20.

47:26in those years, yes, it could attract the so-called kiddie tax, but it would be only for the amount above the basis. And maybe it's not that much. And so now you've just set up your kid with a 15 ,000, 20 ,000, 30 ,000 Roth IRA that they could then go into the rest of their life with. And that could be very powerful.

47:46Brad Barrett:It's like a backdoor, setting up the backdoor Roth for the kid in a way. It's basically a backdoor Roth for the Trump account. So I think those are the two use cases. But my own personal opinion on it is beyond those two use cases, I'd be really conservative with this thing right now, in part just because we haven't seen where the dust is settling. We just don't know what this all looks like. And if you just maxed out the Trump account, so you do 17 years or 18 years of$5 ,000 contributions, you're probably going to have basis that's pretty small proportionally with the growth. And now you just, I mean, I just think there are better ways to transfer wealth to kids, including your own death.

48:24You know, I would just be very conservative with these things outside of those two use cases I outlined. Yeah.

48:31Cody Garrett:I love how you're always conservative and circumspect when it comes to a lot of these new, these new accounts. It's too early to say.

48:38Brad Barrett:There are some real positive aspects of this.

48:41Cody Garrett:I am keeping an eye on it, but yeah, I agree. It's not something that I'm jumping to fun for my kids.

48:47Brad Barrett:And just for fun math, while you're putting my financial calculator, somebody started with a thousand dollar contribution and did the 5 ,000 per year for 18 years going to the kid's account. It grew, let's say grew for 18 years with again, an 8 % return. By the time they reach 18, it's worth about$190 ,000 and about 90 ,000 of that is contributions, right? So about half of it would be contributions and about half would be earnings. So if you did try to do like your backdoor Roth conversions, about half of it would be subject to tax.

49:17Cody Garrett:Guys, one thing I wanted to ask, maybe going back to the 529s, maybe a broader question for each of these account types. We've been talking about parents to kids. Oftentimes, grandparents or relatives want to make gifts to kids. And I know this in my own life with my own kids and nieces and nephews. It's like, how do you best give a gift? And of course, we're not giving advice on how literally how best to, but like, can you make a gift directly into someone's 529? Can you make a gift directly into someone's Trump account, et cetera? And maybe our future accounts that we're going to talk about.

49:51Cody Garrett:Is that, is that something worth discussing regarding the two we've gone through already? Well, we could talk about that a little bit. First of all, there's a pecking order in terms of who can establish a Trump account. And like I said, you pretty much can only have one and only one Trump account because there's one provider. So it's not like, oh, I can have a Roth IRA at Fidelity and one at Schwab. No, it doesn't work that way. And generally, you got to go through the parents. That's like the pecking orders. You generally have to go through the parents on that. Now, a grandparent, in theory, could open a 529 and name the grandchild as a beneficiary.

50:24That's a possibility. There's things like that. I also think it's always best to just coordinate regardless of sort of any sort of technicalities with mom and dad whenever we're thinking about this sort of stuff. But I'd also say for the grandparents, the step up in basis, right? We're closer to being able to access that. And like I said at the onset, the five-year-old doesn't need financial assets and can't use financial assets. So why not put something in your own estate plan, working with a lawyer, put something in your own estate plan to fund for the five-year-old. It could be a trust. It could be an UTMA.

51:03It could be a 529 as part of an estate planning play. You know, there are different ways you can do that.

51:08Brad Barrett:And I'll add to that. We talked about the asset of the child and asset of the parent. Assets of a grandparent or another person are not included for financial aid considerations. So the 529 owned by a grandparent could potentially be one of the options that you look at there.

51:22Cody Garrett:That's interesting. Right. So we said the parents' assets are up to 5.64 % are factored into the financial aid, but it would be zero if it was a grandparent-owned plan. That's very, very interesting. All right, gentlemen, I think we've covered Trump accounts pretty well. So I think the next are two of the major, I guess, brokerage accounts is how I conceptualize it. but I'm curious how you guys do it. These are very similarly acronyms here or initials, the UTMA and the UGMA. I think a lot of people get confused with what the distinction is first off and what these asset accounts are. Cody, you want to start with this one?

52:03Brad Barrett:Sure. So these are called the Uniform Transfers to Minors Act or Uniform Gifts to Minors Act accounts. The UTMA or the UGMA, UTMA, UGMA. Let's simplify this and just say it's a custodial account. So this is a taxable brokerage account for the benefit of a child. So effectively, this is an account that is controlled by the parents. But the money that goes into this account is an irrevocable gift that has to be used for the child's benefit. Sometimes in estate planning, they call this HIMSS, Health Education, Maintenance, and Support. Ultimately, let's say grandma gives junior a$20 bill for their birthday.

52:39Brad Barrett:The parent could open this account, put 20 bucks in it, and it is effectively earmarked as money that's used for that child. So some people do like the idea of not just mentally accounting, but literally accounting for the child's money that was been given to them, maybe by a grandparent or sibling, et cetera. There's a small benefit here of the dividends, interest, capital gains on these assets. So by the way, just a way I think about it is the UGMA, I think of more as like a bank account, like a checking savings account, and the the UTMA being more like the brokerage where you can own ETFs, mutual funds, stocks, bonds, etc.

53:14Brad Barrett:There is one small benefit to this that a portion of the earnings, the unearned income, the dividends, interest, capital gains, when that account is owned by the child, quote unquote, is that a portion of that unearned income can actually be tax free. But once the unearned income exceeds$2 ,700, it's effectively going to be taxed at the parent's rate. And there's a unique tax form that you have to fill out for that. But the kiddie tax, this idea of the kiddie tax prevents parents from trying to shift the significant taxable income into lower brackets of their kids. So some people get really excited about transferring their ETFs to their kids with this unrealized capital gain saying, oh, now the kids can sell it because they have no income.

53:54Brad Barrett:But the government has created this kiddie tax to effectively stop you from doing that in any significant manner. So the Atma, Atma, Agma, this is just a way for your kid to have money for their benefit set aside. The one thing here, though, is that once they turn the age of majority in their state, typically 18 or 21, the ownership becomes the child's. So you have to think to yourself, hey, if I'm setting up this account, putting money in, securities in, do I want this child to have full access? It's kind of restricted and unrestricted simultaneously, right? It's unrestricted for the child, but restricted for the parent because they can't control what the child does with that money because it's legally theirs at the age of majority.

54:33Brad Barrett:Anything to add there, Sean? Well, yeah. So I think if you want to do something like this as a carrier for aunt, uncle, grandparent gifts, fine. But you mentioned a really good point that it becomes unrestricted when the child grows up, essentially. Why not instead keep your powder dry? Keep the option value for mom and dad. Keep the money in mom and dad's account. And then maybe when the child is 25 or 28, maybe they're buying their first home. maybe there's some, you know, a wedding to fund or there's some other very specific intention for it where you have a whole lot more information. You know, you put this$10 ,000 when the child's six years old, you just don't know what they're going to do with it when they grow up.

55:17Why destroy option value and fund one of these things outside of something like a carrier for relative gifts?

55:25Cody Garrett:It's interesting, right? Because there's the reality versus the concept. Like you just said there, Sean, grandma and grandpa give a$500 gift for the holidays or something. There's an accounting issue in terms of like, yeah, you keep it in your, the parents' accounts. And sometimes it's hard to distinguish. Like, do you open up a brokerage account at a different brokerage where you don't already have an account or open a separate account at your brokerage that you kind of earmark for child A, another one for child B, another one for child C, if there is one, To me, from an accounting perspective, otherwise, this is going to get nightmarish in terms of it's all co-mingled with my funds and I don't know what grew at what rate and when this went in, etc.

56:07Cody Garrett:That, to me, is my accountant's brain that wants to explode in this instance.

56:14Brad Barrett:Well, there's one thing you can do. So let's say, my example, Gracie receives a$500 gift. Thank you, Grandma. That$500 gift, instead of opening an account, a custodial account, a child's name, I can simply open a joint account with my wife, a normal taxable brokerage account. Most of like Fidelity, for example, you can add what's called an identifier. So I can put that$500 in there and name the account Gracie's Funds. One of the motivations we talked about earlier is the financial literacy for kids. When Gracie grows up, we can point at this account. It's literally called Gracie's Account. I can show her on the screen, hey, this is the account that's earmarked for money for your use.

56:51Brad Barrett:And again, it's not legally hers, but it's still owned by the parents. But what's great, she can still pick, we can talk about securities, she can still track her own basis, her own investing along the way. We still have that unrestricted access to it now and in the future. So not only can it be used for maybe her first house down payment or her first car or education beyond the 529, but also it could be used for like, we're gonna get a museum membership, right? And maybe Gracie's really excited to go to the children's museum and she says, hey, I wanna use some of my money to buy something at the gift shop.

57:22Brad Barrett:It's not locked up and restricted use assets. We can use that money for her flexibility. And also, like you said, whenever she turns 18, we can make that decision to transfer the asset to her in kind whenever we feel like she has gained enough literacy, right? Not just the education, but the ability to actually utilize that education with what she has. So I think it just gives us more flexibility as parents to, yes, still use the money for her benefit, but we don't have to go through like a legal titling, asset titling to make that happen. Okay.

57:54Cody Garrett:And again, going back to our discussion earlier about the annual gift tax exclusion and the lifetime gift and estate tax exclusion, there's going to be no, essentially, unless this is a crazy amount, for normal people, there's going to be no tax ramification for this whatsoever. Cody, I was unaware that you could set up, you're saying it's under, like, let's say your joint brokerage account, your taxable brokerage account with your wife, you're able to set up what to me almost sounds like a sub account. I don't want to use the wrong terminology. You use the phrase identifier, I think.

58:26Brad Barrett:Yeah. We actually set up a new taxable brokerage account. It's still jointly owned by me and my wife, but we name it, you know, it starts with zero dollars. We name it Gracie's account and then all money for her use. We put in that account, like the grandma's birthday fund, but we still log in to see it separately. I think there's a hassle factor of like setting up like a whole nother account with like a new login and stuff. But for our sake, we would just keep it in our account and just show her that portion of the account when we log in.

58:52Cody Garrett:Okay. So those are the two main taxable brokerage accounts. So when a lot of people ask the question, Hey, I want to open up a, you know, in our community, I want to open up a Vanguard account for my kids. These are your two main options. These UTMA, UGMA. Cody, I think you made the distinction that UGMA has slightly fewer options in terms of what assets can be held in them. I'm pretty sure I have a UTMA account for my kids that I do happen to have it at Vanguard. It's titled in my name, of course, with the kid on it. And then when they reach that age of majority, and actually that's, it's funny because I literally, as we're talking here, guys, I have an action item for myself, which is my daughter just turned 18.

59:33Cody Garrett:So I've got to figure out, Oh, Hey, my name probably is not going to be on here anymore, but does she have a login? Do I have to move it to her own login, et cetera? Like these are questions I don't have an answer to right at this very moment, but this is something I'm going to look into. As always, I'm going to choose advice about taking action. So I'm going to, I'm going to take my own action on this. The next one, my brain went to, we were talking before about the Roth IRAs in terms of 529 to Roth IRAs. And Sean was saying earlier about, oh, you just need a checking account and you do need earned income also.

1:00:07Cody Garrett:I think that's another thing. And this is something else that for minor children with earned income, Roth IRAs are an option as well. Which one of you guys wants to run with this one? I can briefly touch on that. So when I said you just need a checking account, that's the parents just need the checking account to fund the kid's Roth IRA. Do you see what I'm saying? If they're 25 years old. No, no, no. We all got you, Sean. Don't worry. I was just calling back to something that I thought was useful. So yes, if the child has earned income, that sets up the ability to make an annual Roth IRA contribution.

1:00:42Generally speaking, children are not going to have income sufficient where they pay income tax, so they don't need a traditional IRA. So the Roth IRA would be the way they would do it. A few thoughts on this. I think for teenagers, they're working their first job. They've got a W-2 that says they have $1 ,500 of W-2 income, great. If mom and dad are doing really well, and it's got to be really, really well, not just on the road to FI, but if mom and dad are really crushing it financially and they want to get their money into a Roth IRA for the child, great. That's fantastic. What I don't like is tactics where we're trying to create income for the child, to say the child as income.

1:01:27And people ask, should my child work for my business? And I think the way I would personally resolve that is if the federal income tax did not exist, would your child work for your business? If the answer is yes, then yes, do it. But if the federal income tax, i.e. the Roth IRA situation did not exist, would you be having the child work for the business? If the answer is no, then that's a pretty good indicator that you probably shouldn't be doing it anyway.

1:01:54Cody Garrett:Yeah, I like that. It never passed the sniff test for me of like, oh, I'm going to have my kid be a model for pictures for my website and I'm going to pay them$100 an hour. If that was somebody else's kid, is there any world where, A, I would have somebody's kid on my website, and B, that I'd pay them$100 an hour? Like, no, pretty unlikely. So that never passed the smell test for me personally, but obviously to each their own.

1:02:16Brad Barrett:I will say that my daughter, Gracie, she gets the most likes and comments on social media. So maybe we could sniff that out a little.

1:02:22Cody Garrett:Maybe that answers Sean's question of like, hey, would you have Gracie on your platform? I mean, maybe that might drum up more business or something. No, I don't think I'll do that.

1:02:30Brad Barrett:Yeah.

1:02:31Cody Garrett:And guys, one other thing I wanted to mention that's important is a lot of people get confused. So earned income, up to the amount of earned income is the amount that you can contribute to the Roth IRA. But I think crucially, I've never come up with the exact way to describe this, which is not great for a podcaster who needs to describe things succinctly, but it doesn't have to be the same dollars. Your kid, for instance, can earn$1 ,500. And if they decided to spend that$1 ,500 on whatever they want, just life, that's fine. That doesn't mean they are now ineligible to contribute to the Roth IRA.

1:03:05Cody Garrett:Okay. The$1 ,500 can come from someone. It can come from them or it can come from you or it can, et cetera. Like it's just that that$1 ,500 is the amount that they are allowed to contribute to the Roth IRA. If you wanted to, as a parent, give a gift to the child up to that$1 ,500, that could go into the Roth IRA. Now, again, we're not making pronouncements. You should do that, et cetera, et cetera. But that's how it works conceptually, that it's not the same literal dollars.

1:03:31Brad Barrett:Last thing on the Roth IRA for the kid is that the taxable withdrawals are included as unearned income for the FAFSA, as we mentioned, for example, too. Some people have talked about using Roth IRAs, the kids' Roth IRAs, to pay for education, for example. those will be taxable, but without the 10 % penalty for that exclusion. But keep in mind that taxable withdrawals from a Roth IRA are included as unearned income. We talked about the kiddie tax, for example, and also included on the FAFSA as income for the child.

1:04:00Cody Garrett:Okay. That's a good point of clarification. I think this was a really thorough overview of the different account options. We've kind of given some of our own background without being explicit and advice, obviously. We're not giving advice. But in terms of optionality, I think, Sean, you were really explicit about that. And I think that is something that's just really important just in life. If you can have more options, you would always rather that than fewer, especially if the option that got you fewer options in the future didn't really give you any significant benefit, right? Like if you're reducing future optionality for minimal at best current benefit.

1:04:41Cody Garrett:That seems like a sucker's bet as far as I'm concerned. So that's my big takeaway from this. And of course, we went through all the specific accounts and they are important. And I think people are going to walk away with some significant info on that. But any other further thoughts? Anybody want to sum this up? I'll just say, if I'm the parent of a newborn, my default on all this stuff is just no. I think you have to get the profile right for any of these transfers to make sense. And I think the profile is more infrequent than you would imagine, considering some of the hype around these accounts.

1:05:21Look, some of these accounts can absolutely have benefit, but you really got to examine and probe to see if it's the right profile. And like my view is the right profile is a lot rarer than some would think.

1:05:34Brad Barrett:I love where Sean took that because I love the idea of starting with the assumption of no. I think a lot of us start with the assumption of yes, based on those motivations. And then we kind of say, okay, yes, and I'm going to try to find the right vehicle, et cetera. But I think starting with the assumption of no is a great starting point of giving money to our kids. And then kind of the order of operations here is first to understand your own motivations, kind of the end of psychology like we started with, understanding the automatic thoughts about giving to kids, the intermediate thoughts, the core beliefs, going down the CBT framework, start with assumption of no, truly understand your motivations.

1:06:08Brad Barrett:Also, by the way, understand the individual and family motivations together. So if you're making this decision with a partner or spouse, they're certainly discussing your own motivations. And a lot of your own family history will inform those motivations. Like one grew up, had to take out student loans. The other had their education paid for by their parents. You're probably going to have different views on motivations toward giving money to your kids. The second, once you understand your motivations as a family, then truly understand your own sufficiency, like your own path to and through financial independence.

1:06:39Brad Barrett:Understand the optionality between the opportunity cost of giving money to your kids versus keeping it in your own name for your own benefits as a family. And then lastly, only lastly, go into the optimization and the mechanics of, okay, we understand our motivations, We understand our sufficiency. And if at that point you decide, yes, we are still going to save for junior, whether for education or other purposes, then we can look at the mechanics, our choices, the 529, the Trump accounts, the custodial accounts, those UTMAs, UGMAs, the custodial Roth IRAs when they have earned income. And then lastly, our own taxable brokerage accounts as parents and how we can understand the flexibility and restricted use of each of those accounts.

1:07:22Brad Barrett:So order of operations, one last dive here is motivations, sufficiency, and then the mechanics. I think sometimes in the FI community, we start with the mechanics because they're really exciting for our optimized minds. Just try not to do this in the wrong order.

1:07:36Cody Garrett:Gentlemen, thank you very much for being here. I really appreciate it. I appreciate all your service to our community. As we've mentioned, your book, Tax Planning to and Through Early Retirement, it's incredible. It's hard stop, end of story. I think it's pretty hard to make a book about tax planning really interesting and compelling and a must read. And you guys did it. You nailed it. I'm just so proud of your success. I'm so happy for you guys. Where else would you guys like to send people? Where can people reach out to you? You can reach me on my blog, fitaxguy.com. That's sort of my internet home.

1:08:11And you've got links, all sorts of links from there.

1:08:14Brad Barrett:Yeah, and for me, if you're interested in the deep dive on psychology, and some of the mindsets, especially going to retirement planning, you can actually find my LinkedIn profile, Cody Garrett CFP on LinkedIn, where I'm sharing a lot of the frameworks and realizations from the work I'm doing in terms of psychology and money.

1:08:30Cody Garrett:Fantastic. And Cody, we're going to definitely do an episode on the intersection of those things. I'm really excited about the research you're doing. That's very, very cool. If you're listening to this and you want to ask questions, give some feedback, all three of us will keep an eye on our website, chooseify.com. I'm not 100 % sure what episode number this is, but you'll see it in your podcast player. So let's say 611 chooseify.com slash 611. It'll take you directly to the show notes page. You can leave questions, comments there. And like I said, the three of us will keep an eye on it. And maybe we'll do a follow-up episode or a segment if need be.

1:09:05Cody Garrett:As always, thanks for being part of the community and for being here. Listen to Chooseify.