Investing for Your Children's Future: Beginner's Guide & Key Accounts Explained

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2:07All right, folks, welcome to Investing for Beginners podcast. Today, we're going to talk about investing for your children. We're going to talk a little bit about some of the plans that are out there and how you can get started and maybe what kind of returns you might could see and that could give you some maybe inspiration to go ahead and start sooner than later. So I guess with that, let's go ahead and kind of dive into investing for your kids. Like is buying Bitcoin the right way to start or what are your thoughts on how we get started with this? you know what i've seen clips circulating about somebody who was being really down on bitcoin in 2013 so i don't want another clip of me in 10 years saying that like what andrew said about buying bitcoin for your kid so i'm going to plead the fifth on that one but yeah there are a lot of cool accounts that are available some we've talked about we talked a long time ago about and i'd be curious to hear about some of those.

3:07But I think one of the biggest ones that really opened my eyes, and this one is cool because it can apply for your own child, but you can also open one for a niece or nephew. And even though they're not your kid, but that's a 529 account. And how familiar are you with 529s and what? Like mid? Okay. It's tax advantaged account and it can be used for a child to pay for college expenses, education expenses. And so it's a really great way because you get dual benefits. You get early compounding because you can buy stocks with these 529s. So the child gets early compounding and then they get that tax benefit.

3:52And then if the kid ends up not going to college, you basically get the money back. I think you have to pay taxes at that point, but you still get the money back. So it's not money into a black hole necessarily. Yeah. If, if they graduate, I guess, but yeah, I mean, it's, it's, it's a very cool tool that's been around for a while that I think everybody should look into if you're thinking about investment options for your child. Yeah, for sure. I, I, I did, I know enough about it to be dangerous. Uh, I do know like all the great things that you talked about are certainly great options. But I know something that I read in the past, it might've been when I was with the bank, that grandma and grandpa can contribute to it.

4:36So the 529 is available for other family members or friends to invest. So if somebody wants to give your kid$100, instead of giving them the cash, you could have them deposited into the 529 and it can be invested. I think there are certain limits of how much you can put in there. I would probably check with the IRS or the government to double check that because they do update it every year. I did notice that ChatGPT said that the contribution limit this year is$19 ,000 per individual. So that's something to, I guess, keep in mind. If you're a high net earner and you want to put a lot of money in, there certainly, you can, but there's a limit to what you can do with it.

5:23But yeah, that was definitely one of the first ones I discovered when I first kind of got into this whole investing gig. Yeah. I opened one pretty early for my daughter. Big mistake, though. I allocated some money to bonds. That was dumb. Yeah.

5:41Maybe not the best choice, but water under the bridge, right? Yeah. Hey, she's getting free money. Free money is free money. Right. Exactly. complain too much. Yeah, exactly. As far as I know, for 529s, you basically have to buy some sort of fund with them. So whether it's mutual fund, whether it's maybe index funds, the 529 I have for my daughter is with Merrill Edge. And so that only had just different fund to options. So I think I put her in like an S &P and then also a bond fund, which that'll be the last time I talk about that. But you can pick the funds and then you pick, do I want 80 % stocks, 20 % bonds, whatever it is.

6:34And I believe there were also options to go aggressive or value and all the different flavors. And then you could also choose how you want to put new money. So maybe you didn't want to touch the portfolio, but then you said, Hey, all new money is going to be a hundred percent stocks. That could be a way to do it too. And, and it's really simple for me because I'm bank of America. So I can just, just like I would do an automatic transfer into a savings account, I can automatic transfer into a five 29 and it just happens in the background. I don't even have to think about it. It's just a line item on my budget and it has It's grown pretty nicely over time.

7:11I mean, I'm not like what you're talking about at the levels of hitting that max, but it's going in there. It's compounding, and it's growing over time, and it's a great wealth-building tool for your child. Yeah, and that's awesome. The key point to all of this is the earlier you can start, the more benefit we can hand to our kids when they're of school age and ready to step out into the world. whether it is going to school or whether it's becoming the next Jeff Bezos. So we can all dream, right? I guess the next account that I wanted to talk about was what's called an UTMA or an UGMA, depending on what state you live in.

7:57These are custodial accounts. And so these are accounts you can set up for brokerage accounts as well as savings accounts for your child. And they have no contribution limits. and it's a taxable investment account. And the child will, depending again on the state and the rules, will gain full control of the account when they turn 18 or 21. Again, it varies by state. These are cool accounts because they give you a lot of flexibility. They don't have as many tax advantages as the 529 does, for example, but it does give you the ability to literally buy almost anything. So however you choose to invest for your child, you would have a lot of advantages with this.

8:40So the UTMA is the one that I'm most familiar with because that's the one I opened for my daughter and it's the one I worked with when I was in the banking world. And that basically means it's a universal transfer minor account, which means that they are a air quote signer on the account and it's tied to their social security number, but they have no access to it. So the good thing is, is if you get in a fight with your kid when they're 16 and they want to go to the bank and take all their money out, this will not show up in their accounts and their register and they have zero access to it. And they can scream and yell all they want and the bank is not going to give them the money because by law, they're not of age to access it.

9:20So there is that tiny benefit. They're super easy to set up. You can do it through your bank like Andrew did with the 529 at Bank of America. You could do it through the investment account. the the brokers at bank of america i i have mine with fidelity so the so it's tied to my investment account and so it's not it's not quite as easy as andrew's but it is pretty simple i transfer money and then i can just choose which account i wanted to go into and it can go into my daughter's up and then we can invest the money for her or she can choose what investment she wants me to buy So it works pretty slick, and it's a great way to start your kids, especially if you want to start putting money in the stock market.

10:06Yeah, it's a fantastic, fantastic way to go about it. And I believe if you're just making it simpler so you don't have to make these transfers later on, right? So it's setting them off on that foot. Is it like when you turn 18 or when she would turn 18 is when the account, or is it different? You could set the date or you could set the age. Well, with Fidelity, they told me it would be when she turns 18. So I think you can probably determine different ages if you set up trust funds and you can allocate different things and work with a lawyer or with the bank to set a different age if you want to.

10:49And you have the option of doing that if you choose. But again, I think it's going to vary state by state. So some states will automatically wait until you're 21. Some will be 18. Some will be between 18 and 21. So it can vary. But if you have any questions, by all means, talk to the brokerage if that's what you're setting up and just ask them, when does this turn over? And what will happen is the bank will start telling you. They'll start sending you messages that this is coming due. And they'll start kind of timing it. In other words, if you don't do anything, they'll just close the account for you, liquidate all the funds, and just send you a cashier's check.

11:28So you don't want that to happen because that could, you know, that would unnecessarily interrupt any compounding that's been going on. And it could also trigger some tax issues as well. So any way that you can avoid that, the better. But yeah, there's a few loopholes in there that you got to be aware of. But it's a fantastic account. And again, it's super easy and you can buy whatever you want. Yeah, I love that. Is that something you're picking the stocks for her or how are you going about that? Yes. I say that with a caveat. I do discuss with her what I'm going to buy because in a vain attempt so far, I'm trying to get her interested in the stock market.

12:12And all she cares about at this point is, am I making money and is this doing good? so there hasn't been a lot of deep discussion about whether you know spotify is a good investment or not it's you know is it doing well is it making me money and should i keep buying more of it kind of thing so yeah that's that's that's been the extent of it side note her account is destroying me so that there's that so nice yeah of course my yeah so is my my daughters i i've talked on the show before about that but yeah she has nvidia and she added more to nvidia when it was up because this is the stock that's making me the most money so i'm gonna add more yeah yeah yeah my daughter's stock selecting has basically revolved around what are the products that i use so kind of along the peter lynch idea so she's buying netflix nintendo amazon spotify apple so you know she's chosen some some really good companies.

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15:32Yeah, I mean, when you think about the great businesses of the past, a lot of them were born from teenagers. You look at MySpace, Facebook, Apple, iTunes, all these things, right? YouTube was a big one of those too. So what are we doing learning DCFs and all the other crazy stuff that finance professionals handle? Do. It's all craziness. Yeah. Yeah, yeah, for sure. So before we leave the whole account thing, there's a couple other ones I think we probably should mention. The first one is a custodial IRA account. This one is frankly one that I know a little bit about, but I haven't dug deep into the weeds about it.

16:19I'll throw a few things out there. And if you know more, you could certainly please tag on. But it's an IRA. So it's an investment account that our kids can use to start investing for themselves, but it has to come from air quote earned income. So I say air quote because yes, when your child is 13 or 14, in some states they can get a job and they can actually make money. But if you're paying them to do, let's say chores, for example, I don't know how the government looks at that as actual earned income or not. And then if they're paying taxes on that. And so I read a blog post a few years ago about like the nitty gritty of this.

17:00I don't remember much of it, but I do remember that it was a little more complicated than it seemed kind of on the surface. But there are ways, there are legal ways around this that aren't going to get you in trouble that you can use this account to try to start investing for your kids. And it's tax-free. So that's one of the advantages of actually, you know, of looking into it. And so I just wanted to throw that out there. Do you know anything more about it than the brief overview that I give it? Okay. No, this is news to me. So I should be taking notes. All right. There are a lot of people out there that write more extensively about that than I do that we have.

17:41And so if you're interested in it, I definitely would. It's called a custodial IRA. And you can look it up. You can Google it. Google is your friend. The last one that I wanted to throw out there, and this is a new one. I discovered this when we were doing a little research for today's show. And this is called the Trump account. And so this is something that was just put into, well, just enacted with the big, beautiful bill that was passed. So this is going to start in 2026. And so how this is going to work is if you have a baby born, oh, I was wrong. You have a baby born in 2025 to 2028. The government is going to open an account for you, and they're going to give you$1 ,000 in seed money to start the account for young 'uns.

18:26You'll be able to contribute up to$5 ,000 annually, and that will be for the time that is in this account. You must invest in low-cost S &P 500 or U.S. equity index funds. It's tax-deferred growth, so the withdrawals will be taxed as ordinary income. And once the child turns 18, it'll follow IRA rules. So there's a 10 % penalty under 59 to take money out. So it's like a traditional IRA. And then employers can contribute up to$2 ,500. So this is something that's brand new. And at first, I saw it on AI. And so I was like, is this right? And so I Googled it. And I saw that USA Today and H &R Block were writing about it.

19:11So it is a legitimate thing. I haven't heard any other financial people talking about it, so I'm not sure if it's widely known yet that this is going to be available for our kids. That's great. Yeah, definitely a newborn. Go do the research and figure out how to add to this. Because tax deferred growth, that is something that maybe if you're sleeping on tax deferred growth, don't. Because that is such a good benefit. We're talking about hundreds of thousands of dollars over the long term. Potentially. Yeah. Yeah, for sure. And to kind of further that point, I did a little research on the old AI machine and I was curious, what would the numbers look like?

19:55Why is this so important? And so I'll just kind of throw this out there. So if you have a baby, let's say you have a newborn and you open one of these accounts that we're talking about and you want to start investing for them. And you don't have to be fancy and pick all the latest, greatest stocks and everything. If you are buying just an S &P 500 index fund and you put$1 ,000 in as seed money, and then you contribute$100 a month for 18 years, at the end of those 18 years, if the stock market returns its historical average of 10%, the child would have a little over$62 ,000 in their account by the time they turn 18.

20:36And so that's 177 % return over that period. So that is pretty amazing. And I think that's, to me, that's a huge benefit and an encouragement, hopefully, for people that maybe are having newborns right now or are having newborns soon, that this is something you really need to put on your radar as a way to put your kid ahead in life. Think about our lives and how different our lives could have been if we had started with$60 ,000,$70 ,000 in our name at 18. We could have chosen to do other things. It could have helped pay for school. You don't have school debt. It could have helped to start a career, start working as an entrepreneur.

21:24Some crazy idea that you have, this could be some seed money to get you started along those ways. Or it could also give you a couple years of maybe you go travel the world and get an education that way before you start college. I mean, there are so many options. I think that something like this could be a huge, huge benefit to our kids. And it just wasn't really a thing when my parents were of age to have kids. And I didn't start my daughter that way. And in hindsight, I wish I would have. And so this could be hugely beneficial to people. I've been paying a lot more attention to what's actually happening inside my body when I train lately, especially when I hit a wall with my performance and nothing I do seems to move the needle.

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23:48What have you done? I know we have some friends who have talked about how they've gotten their kids interested in investing. you know we don't have to like name names but i've heard some cool stories anything that kind of pops to mind for you of people who have gotten their kids interested in in the stock market at all yeah one of one of our friends he did something cool with his sons he he started them with some seed money and then he started uh basically he created a chart like a big chart that he would put on the floor. And then every year he would sit down with his sons and he would talk to them about the power of compounding.

24:27And then he would make visualizations of how much their money was growing. And he would use things like pennies or quarters or dimes and whatnot and stack them up so the kids could see how much the money was growing. And then he would talk to them about the kinds of investments that they would have and ask them, do you want to continue down this path or do you want to try something different? And he would make icons of different companies, like their logos. He would either just cut out pictures from magazines or whatnot, and he would have those on this graphic so the kids could see, kind of visualize, okay, this company is growing this much, this company is growing this much, so they could kind of put visualizations to it.

25:12And then And he would ask them, okay, do you like this company? Do you want to keep investing in it? Or do you like something else in this group that you would rather invest in? So instead of giving them everything in the stock market, he gave them very limited choices. And it allowed them to, from things that they were familiar with, and it also reinforced that this is a good company because they see the money growing after they've picked this company. and so every year he would sit down with his boys and go over their numbers so they would have like a you know a annual little party and they would put this little chart on the floor and they would go through it and the numbers would grow so he would have to graduate from pennies to like quarters and things like that so but he would do the same thing with the icons he would just he would just keep expanding the pool and giving his sons more and more options and eventually it got to where they were excited about, you know, this, this annual meeting because they got to see how much their money was growing and see how, how well things were doing for them.

26:19And if I remember right, one of the, one of the sons had made over a hundred thousand dollars by the time they turned 18. So it, it gave, it gave the kid a lot of choices of what he wanted to do with his life. and so it was I thought it was a super powerful thing and I keep thinking I need to do that with my daughter but I haven't so I'm the slacker dad so but I think it's amazing and I think the last one I'll throw out there is I also have heard somebody talk about how they give their kid an allowance every week but every month they go over their budget with them and so they could see where the household money is going and so they understand the economics of what's going on in the household and how the money that's being given to them is for chores that contribute to the success of the household.

27:17So doing the dishes or cleaning the cat box or taking out the garbage. They're not super complicated things but it's showing them that they're not just getting the money for free, they're actually having to do something to earn it and then they make the kid, when they give them the money, they have three buckets they have to put it into. They can put money into the spending bucket, the investing bucket, and the giving bucket. So that teaches them that they have to plan, like if they wanna buy a big thing, say they wanted to buy something that was$100 and they're getting$20 a month. Well, they can spend 10 of it, but if they want that big thing, they're gonna have to save$10 to get to it.