Grandchild investing

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Topic Author
Swimmer
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Joined: Tue Dec 29, 2015 3:24 pm

Grandchild investing

Post by Swimmer »

Hello all,
Much to my surprise and delight, my 16 yo granddaughter has developed an interest in investing. She’s read a number of Boglehead-type books. We spent time together on the Vanguard site, and I’m amazed at what she knows and her level of maturity wrt long-term investing.

This summer she has her first job. She wants to open an account at Vanguard. I suggested a Roth. She understands Roth rules but says she doesn’t want the money tied up because after college graduation, she may want to start a business and would need the funds.

What do you all think of this idea? She opens a taxable account. She also opens a Roth where I match the money she puts into her taxable account. Can this be done for a minor child?

I can’t find the answers on the VG site.

Also, she likes etfs as opposed to mutual funds. I think she said that with etfs, she wouldn’t be limited by minimum investment, but I may have misunderstood that. I know next to nothing about etfs.

Currently she has less than $1000 in her savings account. We have a well-funded 529 for her.

Any advice for this budding investor (and her grandmother) would be greatly appreciated.
magicrat
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Re: Grandchild investing

Post by magicrat »

Contributions can be withdrawn anytime

See the wiki: https://www.bogleheads.org/wiki/Roth_IRA#Distributions
aristotelian
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Re: Grandchild investing

Post by aristotelian »

Pretty sure she has to be 18 to open an account at most brokerages. Typically you would have to open a custodial account that you or the parents would control. I believe Fidelity has a minor account now that she could own herself.
Stubbie
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Re: Grandchild investing

Post by Stubbie »

Good for her! I hope my grandchild is that interested when he reaches her age!
exodusNH
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Re: Grandchild investing

Post by exodusNH »

Swimmer wrote: Thu Jun 17, 2021 7:48 am Hello all,
Much to my surprise and delight, my 16 yo granddaughter has developed an interest in investing. She’s read a number of Boglehead-type books. We spent time together on the Vanguard site, and I’m amazed at what she knows and her level of maturity wrt long-term investing.

This summer she has her first job. She wants to open an account at Vanguard. I suggested a Roth. She understands Roth rules but says she doesn’t want the money tied up because after college graduation, she may want to start a business and would need the funds.

What do you all think of this idea? She opens a taxable account. She also opens a Roth where I match the money she puts into her taxable account. Can this be done for a minor child?

I can’t find the answers on the VG site.

Also, she likes etfs as opposed to mutual funds. I think she said that with etfs, she wouldn’t be limited by minimum investment, but I may have misunderstood that. I know next to nothing about etfs.

Currently she has less than $1000 in her savings account. We have a well-funded 529 for her.

Any advice for this budding investor (and her grandmother) would be greatly appreciated.
IRA contributions are limited to the lesser of $6,000 or earned income. You can gift her the funds to contribute to her Roth, but the total amount is going to be limited to what she'll earn over the tax year.

She can withdraw contributions from Roth at any time, but cannot touch the earnings without penalty. E.g. if she puts in $5000 this year, $5500 next year, and $6000 the year after that, she can pull $16500 out of the account. Minus a small window after the withdrawal, you lose that very valuable space permanently.

Roth space is the the most valuable investment dollars you have since taxes are never due. Taxable dollars are second-best, because you're only paying on gains and can potentially deduct losses. Traditional and 401K dollars are the least valuable, as when you withdraw, you will pay taxes on every dollar, not just on the gains. When you pull $1 out of those accounts, you may only wind up with anywhere between $0.60 and $1.00. When you take $1 out of taxable, you subtract what you paid for it and then pay on that difference. E.g. You bought the stock for $0.50, it's now worth $1.00. You get the $0.50 for "free" since that was your money to begin with. You then pay taxes only the $0.50, which will be half of the IRA taxes.

With Roth, that $1 coming out of your account is $1 in your pocket.

With Vanguard, ETFs can be purchased in whole shares. Take the total US stock market mutual fund, VTSAX, vs. the ETF equivalent, VTI. In order to buy into VTSAX, you have to invest $3,000. After that $3,000, you can continue buying amounts as small as $1. With VTI, you can purchase 1 share for $220 (right now.) However, to purchase more of VTI, you have to spend another $220. So, if you have $300 you could invest, you'd buy one share for $220 and then have $80 of cash sitting on the sideline.

With the mutual fund, you could instead buy $50/week after that initial $3,000. Vanguard offers automated investments into mutual funds, but not ETFs.

Other brokerages offer the ability to buy fractional shares of some/all ETFs (varies by brokerage.) Some may also allow automated investing into ETFs.

The Vanguard target date funds have only a $1,000 minimum.
Flashes1
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Re: Grandchild investing

Post by Flashes1 »

How do you go about opening a Roth for a 16 year old?

1. Can you do that at Vanguard?
2. What's the minimum initial investment?
Topic Author
Swimmer
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Re: Grandchild investing

Post by Swimmer »

aristotelian wrote: Thu Jun 17, 2021 8:44 am Pretty sure she has to be 18 to open an account at most brokerages. Typically you would have to open a custodial account that you or the parents would control. I believe Fidelity has a minor account now that she could own herself.
Yes. I spoke with VG this morning. I would be custodian until she reaches 18. I’ll look at Fidelity as well.
delamer
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Re: Grandchild investing

Post by delamer »

Flashes1 wrote: Thu Jun 17, 2021 2:37 pm How do you go about opening a Roth for a 16 year old?

1. Can you do that at Vanguard?
2. What's the minimum initial investment?
1. Yes.
2. Depends on the fund.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Topic Author
Swimmer
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Re: Grandchild investing

Post by Swimmer »

aristotelian wrote: Thu Jun 17, 2021 8:44 am Pretty sure she has to be 18 to open an account at most brokerages. Typically you would have to open a custodial account that you or the parents would control. I believe Fidelity has a minor account now that she could own herself.

Customer service at Fido was lacking big time.
I finally found “RothIRA For Kids.” Initially, no mention of “custodian.” But when you drill down, sure enough, it is a custodian account just like Vanguard’s. At least at VG, I was finally able to speak with a human.

Thanks for the advice, though.
aristotelian
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Re: Grandchild investing

Post by aristotelian »

Swimmer wrote: Thu Jun 17, 2021 3:13 pm
aristotelian wrote: Thu Jun 17, 2021 8:44 am Pretty sure she has to be 18 to open an account at most brokerages. Typically you would have to open a custodial account that you or the parents would control. I believe Fidelity has a minor account now that she could own herself.

Customer service at Fido was lacking big time.
I finally found “RothIRA For Kids.” Initially, no mention of “custodian.” But when you drill down, sure enough, it is a custodian account just like Vanguard’s. At least at VG, I was finally able to speak with a human.

Thanks for the advice, though.
I was referring to their Youth Account. Not Roth, though, as far as I can tell. Try this. https://www.fidelity.com/go/youth-account/overview
sureshoe
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Re: Grandchild investing

Post by sureshoe »

For kids who have parents or grandparents of means, you should do whatever you can to get them to earned income numbers that allow them to max out Roth IRAs. Trying to figure out a way to (legally) get my kids a maxed out Roth from ages 12 to 18, talk about a leg up in life.

I know this young lady might think she wants to touch the money to open a business, but being able to let $6000 grow for 44 years completely tax free... that is a ridiculous gift. Assume the laws don't change, that could be $160k+ when she is 60 years old. Oof.
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Nate79
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Re: Grandchild investing

Post by Nate79 »

Personally I think the parents should be the custodians of the account, not the grandparents.
Topic Author
Swimmer
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Re: Grandchild investing

Post by Swimmer »

Nate79 wrote: Fri Jun 18, 2021 10:58 am Personally I think the parents should be the custodians of the account, not the grandparents.
Maybe we need to reconsider. I thought I’d do it because I understand investing better than the parents and would have more time to devote to it.

Is there a reason for your opinion?
Topic Author
Swimmer
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Re: Grandchild investing

Post by Swimmer »

OP here. I wanted to close the loop on this. Due to multiple customer service failures in trying to open a Roth for my grandchild at VG, I gave up on VG and went to Schwab.

We met with them at a local office, completed the paperwork and dear grandchild has her Roth now! Today, with phone rep guidance, she just purchased her first ETF! He also talked us through linking her checking account. Spoke with a person. No hold time or endless robo system. We’re very pleased with Schwab. They, very likely, have a new lifelong customer.
alex_686
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Re: Grandchild investing

Post by alex_686 »

Swimmer wrote: Fri Jun 18, 2021 11:20 am
Nate79 wrote: Fri Jun 18, 2021 10:58 am Personally I think the parents should be the custodians of the account, not the grandparents.
Maybe we need to reconsider. I thought I’d do it because I understand investing better than the parents and would have more time to devote to it.

Is there a reason for your opinion?
I will modestly suggest that you be the custodian.

My father taught me to drive. It was not a pleasant experience. Sometimes you need some emotional distance from your teacher to have frank honest conversations.

She seems to have a good open relationship with you. I would keep the parents in the loop. In the end it is not going to matter much. The custodial period is just going to be a few years.

The Roth makes more rational sense. High degree of flexibility in terms of withdrawal. However I am a bit indifferent to it, versus taxes. It is a small amount and she will have immediate needs. Or at least wants, like a car or a summer in Europe. Part of growing up is becoming responsible. To do that you actually have to give them responsibilities, let them make their choices, and reap the consequences- both good or bad. If we were talking a number over 50k I might have a different opinion. Or maybe not.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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SmileyFace
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Re: Grandchild investing

Post by SmileyFace »

Swimmer wrote: Wed Jul 14, 2021 12:02 pm OP here. I wanted to close the loop on this. Due to multiple customer service failures in trying to open a Roth for my grandchild at VG, I gave up on VG and went to Schwab.

We met with them at a local office, completed the paperwork and dear grandchild has her Roth now! Today, with phone rep guidance, she just purchased her first ETF! He also talked us through linking her checking account. Spoke with a person. No hold time or endless robo system. We’re very pleased with Schwab. They, very likely, have a new lifelong customer.
Awesome! She can still buy Vanguard ETFs at Schwab if she wants. Thanks for the update.
Topic Author
Swimmer
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Re: Grandchild investing

Post by Swimmer »

alex_686 wrote: Wed Jul 14, 2021 12:14 pm
Swimmer wrote: Fri Jun 18, 2021 11:20 am
Nate79 wrote: Fri Jun 18, 2021 10:58 am Personally I think the parents should be the custodians of the account, not the grandparents.
Maybe we need to reconsider. I thought I’d do it because I understand investing better than the parents and would have more time to devote to it.

Is there a reason for your opinion?
I will modestly suggest that you be the custodian.

My father taught me to drive. It was not a pleasant experience. Sometimes you need some emotional distance from your teacher to have frank honest conversations.

She seems to have a good open relationship with you. I would keep the parents in the loop. In the end it is not going to matter much. The custodial period is just going to be a few years.

The Roth makes more rational sense. High degree of flexibility in terms of withdrawal. However I am a bit indifferent to it, versus taxes. It is a small amount and she will have immediate needs. Or at least wants, like a car or a summer in Europe. Part of growing up is becoming responsible. To do that you actually have to give them responsibilities, let them make their choices, and reap the consequences- both good or bad. If we were talking a number over 50k I might have a different opinion. Or maybe not.

Thanks for your comments. I did become custodian and it seems to be enhancing our bond and giving me the opportunity to talk about investing with her. And you’re correct, it will only be for 1.5 years. She’ll definitely be ready to take over then without my guidance. I feel blessed to have been able to do this for her.
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Nate79
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Re: Grandchild investing

Post by Nate79 »

Swimmer wrote: Wed Jul 14, 2021 12:22 pm
alex_686 wrote: Wed Jul 14, 2021 12:14 pm
Swimmer wrote: Fri Jun 18, 2021 11:20 am
Nate79 wrote: Fri Jun 18, 2021 10:58 am Personally I think the parents should be the custodians of the account, not the grandparents.
Maybe we need to reconsider. I thought I’d do it because I understand investing better than the parents and would have more time to devote to it.

Is there a reason for your opinion?
I will modestly suggest that you be the custodian.

My father taught me to drive. It was not a pleasant experience. Sometimes you need some emotional distance from your teacher to have frank honest conversations.

She seems to have a good open relationship with you. I would keep the parents in the loop. In the end it is not going to matter much. The custodial period is just going to be a few years.

The Roth makes more rational sense. High degree of flexibility in terms of withdrawal. However I am a bit indifferent to it, versus taxes. It is a small amount and she will have immediate needs. Or at least wants, like a car or a summer in Europe. Part of growing up is becoming responsible. To do that you actually have to give them responsibilities, let them make their choices, and reap the consequences- both good or bad. If we were talking a number over 50k I might have a different opinion. Or maybe not.

Thanks for your comments. I did become custodian and it seems to be enhancing our bond and giving me the opportunity to talk about investing with her. And you’re correct, it will only be for 1.5 years. She’ll definitely be ready to take over then without my guidance. I feel blessed to have been able to do this for her.
Who is dealing with the tax implications of this account?
RetiredAL
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Re: Grandchild investing

Post by RetiredAL »

Nate79 wrote: Wed Jul 14, 2021 6:20 pm
Swimmer wrote: Wed Jul 14, 2021 12:22 pm
alex_686 wrote: Wed Jul 14, 2021 12:14 pm
Swimmer wrote: Fri Jun 18, 2021 11:20 am
Nate79 wrote: Fri Jun 18, 2021 10:58 am Personally I think the parents should be the custodians of the account, not the grandparents.
Maybe we need to reconsider. I thought I’d do it because I understand investing better than the parents and would have more time to devote to it.

Is there a reason for your opinion?
I will modestly suggest that you be the custodian.

My father taught me to drive. It was not a pleasant experience. Sometimes you need some emotional distance from your teacher to have frank honest conversations.

She seems to have a good open relationship with you. I would keep the parents in the loop. In the end it is not going to matter much. The custodial period is just going to be a few years.

The Roth makes more rational sense. High degree of flexibility in terms of withdrawal. However I am a bit indifferent to it, versus taxes. It is a small amount and she will have immediate needs. Or at least wants, like a car or a summer in Europe. Part of growing up is becoming responsible. To do that you actually have to give them responsibilities, let them make their choices, and reap the consequences- both good or bad. If we were talking a number over 50k I might have a different opinion. Or maybe not.

Thanks for your comments. I did become custodian and it seems to be enhancing our bond and giving me the opportunity to talk about investing with her. And you’re correct, it will only be for 1.5 years. She’ll definitely be ready to take over then without my guidance. I feel blessed to have been able to do this for her.
Who is dealing with the tax implications of this account?
I am the custodian to both of my Grand-kid's UTMA accounts. I prepare their tax forms. DD signs and submits them. Thru careful harvesting mgmt, the taxes to date have been zero. If some tax is due along the way, I'll pay it. DD is assigned as Successor Custodian if something happens to me.

DD is well aware of UTMA accounts. Her Grandfather funded one for her that helped her with college expenses. She left for college with that account's checkbook in-hand and still had some left after she had completed her Masters.
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