Brokerage account for kids - what type of funds are ideal?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Eurookat
Posts: 364
Joined: Sat Nov 29, 2014 12:44 pm

Brokerage account for kids - what type of funds are ideal?

Post by Eurookat »

Not looking to debate whether this is right or wrong to do ...

Each month I deposit $100 into two separate accounts (I have two kids). The accounts are in my name and my goal is to "give" them the money once they turn 18. I'll be on the hook for taxes when I sell but I'll control when and how much (entire account or bits and pieces). Having recently learned that mutual funds aren't ideal in a taxable account I'm considering redirecting the money into an ETF. However I wouldnt be able to buy fractional shares.

Is anyone doing anything similar? What are my options other than saving up $3k and putting it into a VTSAX which I understand is more tax efficient.
mhalley
Posts: 10432
Joined: Tue Nov 20, 2007 5:02 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by mhalley »

Nothing wrong with mutual funds in taxable account, depending on the fund. Check out the wiki on tax efficiency. https://www.bogleheads.org/wiki/Tax-eff ... _placement
A couple of options
Use etfs like VTI or vxus
Switch to Schwab which has lower limits on mutual funds.
Switch to fidelity which offers fractional shares.
Use vanguard star or td fund with 1k limit. Note that this may not be tax efficient, vanguard td fund put out a huge cap gain last year.
BUBear29
Posts: 396
Joined: Wed Aug 19, 2015 4:20 pm
Location: DFW

Re: Brokerage account for kids - what type of funds are ideal?

Post by BUBear29 »

I have all my kids funds in one account and plan to divide into 1/3’s at a future date. Currently modeling my portfolio after VFORX but i use ETFs since I am at Fidelity.

VTI
VXUS
VTEB

Once I accumulate more and kids are older, I’ll aim for 60/40 split.
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.
synacksyn
Posts: 23
Joined: Fri Jan 14, 2022 12:26 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by synacksyn »

I have both my daughters in FSKAX.
secondcor521
Posts: 1604
Joined: Wed Sep 10, 2014 4:11 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by secondcor521 »

I started all three of my kids with Roth IRAs at Schwab in SWTSX. One of mine likes stock picking though, so he has some in NKE and FTEC as well.

Back when my kids were starting out, Schwab was very accommodating on custodial Roth IRAs and opening accounts with very low initial deposits. Vanguard, where I do most of my stuff, not so much. I was thinking eventually they could switch back to Vanguard for lower costs, but with the decline in service at Vanguard and the decline in costs at Schwab, I think they'll just stay there. It's also nice having a local office where they can walk in and get stuff figured out.

Depending on how you end up doing things, you might consider gifting shares to the kids instead of selling them. Defers the realizing capital gains, and they generally get your acquisition date and basis, although the rules for gifted shares are different so read up on those before doing this. Or just start them with custodial accounts of their own and buy the shares inside their accounts. Taxation and impact on college financial aid differs between those two ideas.

I think anything that gets kids used to investing so they're comfortable with everything from the logins to the investment purchases to understanding and minimizing investment expenses to the tax stuff is a fantastic start. My kids are all in their 20s and each of them have already noticed how nice it is to see their investments growing, and each of them is comfortable with filing their own tax returns, so I'm happy that they've already managed to grok what I've been saying, and that they're not intimidated or scared by investments or taxes. I'm sure they'll go off on their own paths and possible tangents from time to time, but at least I've given them a pretty good start.
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by nolesrule »

My kids are in Vanguard Total World ETF (VT). In a brokerage account, which I tax gain harvest each December.

My oldest was able to start a Roth IRA this past year with a small amount of W-2 money. The price was just low enough for 1 share of ITOT.
softwaregeek
Posts: 951
Joined: Wed May 08, 2019 8:59 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by softwaregeek »

For my kids, Small cap index etf. 80 percent, international etf 20 percent. I figure the time horizon is long enough that sector that specific investments don’t matter as long as they are cheap indexes.
Robdac
Posts: 154
Joined: Tue Aug 06, 2019 3:23 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by Robdac »

We did something similar and let the kids choose individual stocks. We then tracked them over about two years. We met regularly and discussed investing topics and index funds. After two years they learned that thad they just put it all in a Schwab Total Market Index Fund they would have had more money overall for a lot less effort and wouldn't have had to sit through all our financial meetings and me talking! It was a great education on investing.

So, if you have an account at Schwab look at SWTSX. At Fidelity, FSKAX. At Vanguard VTI will get you to get the ETF and avoid account minimums.
User avatar
Huygens
Posts: 109
Joined: Tue Dec 04, 2018 7:35 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by Huygens »

nolesrule wrote: Fri Jan 21, 2022 9:32 pm My kids are in Vanguard Total World ETF (VT). In a brokerage account, which I tax gain harvest each December.
That's a great idea to tax gain harvest and increase the cost basis. Why didn't I think of that? :oops:
There are the haves, have-nots, and have-yachts.
User avatar
LadyGeek
Site Admin
Posts: 95691
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Brokerage account for kids - what type of funds are ideal?

Post by LadyGeek »

This thread is now in the Personal Investments forum (account help).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Ed 2
Posts: 2692
Joined: Sat May 15, 2010 9:34 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by Ed 2 »

Eurookat wrote: Thu Jan 20, 2022 11:24 pm Not looking to debate whether this is right or wrong to do ...

Each month I deposit $100 into two separate accounts (I have two kids). The accounts are in my name and my goal is to "give" them the money once they turn 18. I'll be on the hook for taxes when I sell but I'll control when and how much (entire account or bits and pieces). Having recently learned that mutual funds aren't ideal in a taxable account I'm considering redirecting the money into an ETF. However I wouldnt be able to buy fractional shares.

Is anyone doing anything similar? What are my options other than saving up $3k and putting it into a VTSAX which I understand is more tax efficient.
Set up Index funds , not ETF’s. Why? Because you can setup auto investing into index funds . ETFs have no auto investing option. You will create a habit for your kids of long term passive investing vs trading ETF’s . Once they understand how it works they will decide if they need investing into ETF’s
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by aristotelian »

Ed 2 wrote: Sat Jan 22, 2022 8:26 am
Eurookat wrote: Thu Jan 20, 2022 11:24 pm Not looking to debate whether this is right or wrong to do ...

Each month I deposit $100 into two separate accounts (I have two kids). The accounts are in my name and my goal is to "give" them the money once they turn 18. I'll be on the hook for taxes when I sell but I'll control when and how much (entire account or bits and pieces). Having recently learned that mutual funds aren't ideal in a taxable account I'm considering redirecting the money into an ETF. However I wouldnt be able to buy fractional shares.

Is anyone doing anything similar? What are my options other than saving up $3k and putting it into a VTSAX which I understand is more tax efficient.
Set up Index funds , not ETF’s. Why? Because you can setup auto investing into index funds . ETFs have no auto investing option. You will create a habit for your kids of long term passive investing vs trading ETF’s . Once they understand how it works they will decide if they need investing into ETF’s
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.

The issue with VTI is share price. They want to do $100/m and VTI is over $200. ITOT would seem to be perfect. SPTM or SCHB as well.

Another possibility is M1 Finance which allows you to purchase ETFs in dollar based increments rather than whole shares. If you prefer buying mutual funds to "trading" ETFs but want the portability of ETFs this would be a good choice.
BUBear29
Posts: 396
Joined: Wed Aug 19, 2015 4:20 pm
Location: DFW

Re: Brokerage account for kids - what type of funds are ideal?

Post by BUBear29 »

Fractional shares are available at Fidelity
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.
Ed 2
Posts: 2692
Joined: Sat May 15, 2010 9:34 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by Ed 2 »

aristotelian wrote: Sat Jan 22, 2022 8:33 am
Ed 2 wrote: Sat Jan 22, 2022 8:26 am
Eurookat wrote: Thu Jan 20, 2022 11:24 pm Not looking to debate whether this is right or wrong to do ...

Each month I deposit $100 into two separate accounts (I have two kids). The accounts are in my name and my goal is to "give" them the money once they turn 18. I'll be on the hook for taxes when I sell but I'll control when and how much (entire account or bits and pieces). Having recently learned that mutual funds aren't ideal in a taxable account I'm considering redirecting the money into an ETF. However I wouldnt be able to buy fractional shares.

Is anyone doing anything similar? What are my options other than saving up $3k and putting it into a VTSAX which I understand is more tax efficient.
Set up Index funds , not ETF’s. Why? Because you can setup auto investing into index funds . ETFs have no auto investing option. You will create a habit for your kids of long term passive investing vs trading ETF’s . Once they understand how it works they will decide if they need investing into ETF’s
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.

The issue with VTI is share price. They want to do $100/m and VTI is over $200. ITOT would seem to be perfect. SPTM or SCHB as well.

Another possibility is M1 Finance which allows you to purchase ETFs in dollar based increments rather than whole shares. If you prefer buying mutual funds to "trading" ETFs but want the portability of ETFs this would be a good choice.
Those you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial deposits
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
BUBear29
Posts: 396
Joined: Wed Aug 19, 2015 4:20 pm
Location: DFW

Re: Brokerage account for kids - what type of funds are ideal?

Post by BUBear29 »

Ed 2 wrote: Sat Jan 22, 2022 8:37 am
aristotelian wrote: Sat Jan 22, 2022 8:33 am
Ed 2 wrote: Sat Jan 22, 2022 8:26 am
Eurookat wrote: Thu Jan 20, 2022 11:24 pm Not looking to debate whether this is right or wrong to do ...

Each month I deposit $100 into two separate accounts (I have two kids). The accounts are in my name and my goal is to "give" them the money once they turn 18. I'll be on the hook for taxes when I sell but I'll control when and how much (entire account or bits and pieces). Having recently learned that mutual funds aren't ideal in a taxable account I'm considering redirecting the money into an ETF. However I wouldnt be able to buy fractional shares.

Is anyone doing anything similar? What are my options other than saving up $3k and putting it into a VTSAX which I understand is more tax efficient.
Set up Index funds , not ETF’s. Why? Because you can setup auto investing into index funds . ETFs have no auto investing option. You will create a habit for your kids of long term passive investing vs trading ETF’s . Once they understand how it works they will decide if they need investing into ETF’s
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.

The issue with VTI is share price. They want to do $100/m and VTI is over $200. ITOT would seem to be perfect. SPTM or SCHB as well.

Another possibility is M1 Finance which allows you to purchase ETFs in dollar based increments rather than whole shares. If you prefer buying mutual funds to "trading" ETFs but want the portability of ETFs this would be a good choice.
Those you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial deposits
think you mean to say mutual funds
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.
Ed 2
Posts: 2692
Joined: Sat May 15, 2010 9:34 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by Ed 2 »

BUBear29 wrote: Sat Jan 22, 2022 8:39 am
Ed 2 wrote: Sat Jan 22, 2022 8:37 am
aristotelian wrote: Sat Jan 22, 2022 8:33 am
Ed 2 wrote: Sat Jan 22, 2022 8:26 am
Eurookat wrote: Thu Jan 20, 2022 11:24 pm Not looking to debate whether this is right or wrong to do ...

Each month I deposit $100 into two separate accounts (I have two kids). The accounts are in my name and my goal is to "give" them the money once they turn 18. I'll be on the hook for taxes when I sell but I'll control when and how much (entire account or bits and pieces). Having recently learned that mutual funds aren't ideal in a taxable account I'm considering redirecting the money into an ETF. However I wouldnt be able to buy fractional shares.

Is anyone doing anything similar? What are my options other than saving up $3k and putting it into a VTSAX which I understand is more tax efficient.
Set up Index funds , not ETF’s. Why? Because you can setup auto investing into index funds . ETFs have no auto investing option. You will create a habit for your kids of long term passive investing vs trading ETF’s . Once they understand how it works they will decide if they need investing into ETF’s
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.

The issue with VTI is share price. They want to do $100/m and VTI is over $200. ITOT would seem to be perfect. SPTM or SCHB as well.

Another possibility is M1 Finance which allows you to purchase ETFs in dollar based increments rather than whole shares. If you prefer buying mutual funds to "trading" ETFs but want the portability of ETFs this would be a good choice.
Those you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial deposits
think you mean to say mutual funds
Index funds are mutual funds
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
BUBear29
Posts: 396
Joined: Wed Aug 19, 2015 4:20 pm
Location: DFW

Re: Brokerage account for kids - what type of funds are ideal?

Post by BUBear29 »

Ed 2 wrote: Sat Jan 22, 2022 8:43 am
BUBear29 wrote: Sat Jan 22, 2022 8:39 am
Ed 2 wrote: Sat Jan 22, 2022 8:37 am
aristotelian wrote: Sat Jan 22, 2022 8:33 am
Ed 2 wrote: Sat Jan 22, 2022 8:26 am

Set up Index funds , not ETF’s. Why? Because you can setup auto investing into index funds . ETFs have no auto investing option. You will create a habit for your kids of long term passive investing vs trading ETF’s . Once they understand how it works they will decide if they need investing into ETF’s
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.

The issue with VTI is share price. They want to do $100/m and VTI is over $200. ITOT would seem to be perfect. SPTM or SCHB as well.

Another possibility is M1 Finance which allows you to purchase ETFs in dollar based increments rather than whole shares. If you prefer buying mutual funds to "trading" ETFs but want the portability of ETFs this would be a good choice.
Those you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial deposits
think you mean to say mutual funds
Index funds are mutual funds
An index fund is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments.
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by nolesrule »

I transfer the money in monthly. In my case it's a percentage of leftover money at the end of the month, just like my own taxable investments. I then buy the ETF shares based on the cash in the settlement fund.

I don't care about the cash drag of less than one share. Over time it becomes less of a percentage of the total value of the account, and frankly the market movement doesn't make that much a difference on such a small amount.

If you plan to switch to mutual funds from ETFs once you reach minimum amounts, you need to do it before the capital gains exceed the amount you can tax gain harvest.
Last edited by nolesrule on Sat Jan 22, 2022 8:50 am, edited 1 time in total.
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by aristotelian »

Ed 2 wrote: Sat Jan 22, 2022 8:37 am
aristotelian wrote: Sat Jan 22, 2022 8:33 am
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.

The issue with VTI is share price. They want to do $100/m and VTI is over $200. ITOT would seem to be perfect. SPTM or SCHB as well.

Another possibility is M1 Finance which allows you to purchase ETFs in dollar based increments rather than whole shares. If you prefer buying mutual funds to "trading" ETFs but want the portability of ETFs this would be a good choice.
Those you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial deposits
Yes, I mentioned the possibility of mutual funds at Fidelity and Schwab. Based on OP it appears they are at Vanguard and don't have the $3k minimum. If they want to stay at Vanguard and purchase in small increments they would need to do the above mentioned ETF's.
RetiredAL
Posts: 3537
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: Brokerage account for kids - what type of funds are ideal?

Post by RetiredAL »

My Grandkid's accounts (ages 3 and 6) hold only SCHB - Broad Market and SCHG - Large Growth.

Why 2 holdings? These are UTMA's and I gain harvest them between those 2 ETF's.
Ed 2
Posts: 2692
Joined: Sat May 15, 2010 9:34 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by Ed 2 »

RetiredAL wrote: Sat Jan 22, 2022 8:55 am My Grandkid's accounts (ages 3 and 6) hold only SCHB - Broad Market and SCHG - Large Growth.

Why 2 holdings? These are UTMA's and I gain harvest them between those 2 ETF's.
Why gain harvest? Do you realise they got 60+ years until they need money? :beer
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
User avatar
Pete12
Posts: 607
Joined: Tue Jun 28, 2016 3:17 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by Pete12 »

nolesrule wrote: Fri Jan 21, 2022 9:32 pm My kids are in Vanguard Total World ETF (VT). In a brokerage account, which I tax gain harvest each December.
What a great idea! I assume these are UTMA accounts for the kids? To make this work do you have to file separate annual tax returns for your kids to report the gains?
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by nolesrule »

Pete12 wrote: Sat Jan 22, 2022 9:00 am
nolesrule wrote: Fri Jan 21, 2022 9:32 pm My kids are in Vanguard Total World ETF (VT). In a brokerage account, which I tax gain harvest each December.
What a great idea! I assume these are UTMA accounts for the kids? To make this work do you have to file separate annual tax returns for your kids to report the gains?
Yes and yes.
Ed 2
Posts: 2692
Joined: Sat May 15, 2010 9:34 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by Ed 2 »

aristotelian wrote: Sat Jan 22, 2022 8:50 am
Ed 2 wrote: Sat Jan 22, 2022 8:37 am
aristotelian wrote: Sat Jan 22, 2022 8:33 am
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.

The issue with VTI is share price. They want to do $100/m and VTI is over $200. ITOT would seem to be perfect. SPTM or SCHB as well.

Another possibility is M1 Finance which allows you to purchase ETFs in dollar based increments rather than whole shares. If you prefer buying mutual funds to "trading" ETFs but want the portability of ETFs this would be a good choice.
Those you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial deposits
Yes, I mentioned the possibility of mutual funds at Fidelity and Schwab. Based on OP it appears they are at Vanguard and don't have the $3k minimum. If they want to stay at Vanguard and purchase in small increments they would need to do the above mentioned ETF's.
+1. My point was to teach kids to invest by using better options like regular plane vanilla Index funds without trading option. Their brains still develop , takes time, I admit some adults never learn at even 70. ))
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by nolesrule »

Ed 2 wrote: Sat Jan 22, 2022 8:59 am
RetiredAL wrote: Sat Jan 22, 2022 8:55 am My Grandkid's accounts (ages 3 and 6) hold only SCHB - Broad Market and SCHG - Large Growth.

Why 2 holdings? These are UTMA's and I gain harvest them between those 2 ETF's.
Why gain harvest? Do you realise they got 60+ years until they need money? :beer
Because by the time they get control of the accounts you can raise the cost basis by about $2000 per year. And they might want or need the money earlier than in 60+ years. The increase in cost basis means less capital gains consuming lower brackets when it comes time to sell.

That said, there's no need for 2 holdings with tax gain harvesting. I just sell and buy back in immediately.
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by aristotelian »

Ed 2 wrote: Sat Jan 22, 2022 9:03 am
aristotelian wrote: Sat Jan 22, 2022 8:50 am
Ed 2 wrote: Sat Jan 22, 2022 8:37 am
aristotelian wrote: Sat Jan 22, 2022 8:33 am
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.

The issue with VTI is share price. They want to do $100/m and VTI is over $200. ITOT would seem to be perfect. SPTM or SCHB as well.

Another possibility is M1 Finance which allows you to purchase ETFs in dollar based increments rather than whole shares. If you prefer buying mutual funds to "trading" ETFs but want the portability of ETFs this would be a good choice.
Those you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial deposits
Yes, I mentioned the possibility of mutual funds at Fidelity and Schwab. Based on OP it appears they are at Vanguard and don't have the $3k minimum. If they want to stay at Vanguard and purchase in small increments they would need to do the above mentioned ETF's.
+1. My point was to teach kids to invest by using better options like regular plane vanilla Index funds without trading option. Their brains still develop , takes time, I admit some adults never learn at even 70. ))
My impression is this is a custodial account. I don't think OP is having kids do the trading. Anyway I don't see a big difference between ETFs and mutual funds except that ETFs trade throughout the day and mutual funds trade after markets close. VTI and VTSAX are different classes of the exact same fund. It is certainly possible to trade mutual funds and develop poor investing habits and to buy and hold ETFs and develop good habits.
RetiredAL
Posts: 3537
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: Brokerage account for kids - what type of funds are ideal?

Post by RetiredAL »

nolesrule wrote: Sat Jan 22, 2022 9:10 am
Ed 2 wrote: Sat Jan 22, 2022 8:59 am
RetiredAL wrote: Sat Jan 22, 2022 8:55 am My Grandkid's accounts (ages 3 and 6) hold only SCHB - Broad Market and SCHG - Large Growth.

Why 2 holdings? These are UTMA's and I gain harvest them between those 2 ETF's.
Why gain harvest? Do you realise they got 60+ years until they need money? :beer
Because by the time they get control of the accounts you can raise the cost basis by about $2000 per year. And they might want or need the money earlier than in 60+ years. The increase in cost basis means less capital gains consuming lower brackets when it comes time to sell.

That said, there's no need for 2 holdings with tax gain harvesting. I just sell and buy back in immediately.
I use 2 holdings for a clear mindset delineation between LT and ST. These accounts hold more than can be gain harvested in a year, so I sold some LT B to the zero tax limit and buy G this last Dec, then will sell some LT G to buy B this coming Dec. Due to dividend distribution timing, the window to calc all of this is small and get interfered with by the holidays.

And you are exactly right about raising the cost basis. This is "getting started in life" money that I expect to get tapped at college age or shortly thereafter. At college age, the gains would get taxed at their parent's marginal rate. Harvesting has the potential to void $40,000 of LT gain at age 18.
Peripatetic Investor
Posts: 61
Joined: Sat Nov 06, 2021 8:45 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by Peripatetic Investor »

nolesrule wrote: Sat Jan 22, 2022 9:10 am
Ed 2 wrote: Sat Jan 22, 2022 8:59 am
RetiredAL wrote: Sat Jan 22, 2022 8:55 am My Grandkid's accounts (ages 3 and 6) hold only SCHB - Broad Market and SCHG - Large Growth.

Why 2 holdings? These are UTMA's and I gain harvest them between those 2 ETF's.
Why gain harvest? Do you realise they got 60+ years until they need money? :beer
Because by the time they get control of the accounts you can raise the cost basis by about $2000 per year. And they might want or need the money earlier than in 60+ years. The increase in cost basis means less capital gains consuming lower brackets when it comes time to sell.

That said, there's no need for 2 holdings with tax gain harvesting. I just sell and buy back in immediately.
I'm just about to set up an UTMA account for my child, which I'll initially fund with low-basis VBIAX from my taxable account, with the intention of tax gain harvesting that stock in the UTMA. Then I'm going to invest the proceeds from the tax gain harvesting into VTI (Total Market) and / or VUG (Growth), in order to minimize dividend yield, while tax gain harvesting THAT up to the Kiddie Tax limit each year ($2300, taking into account both gain and dividend yield). My question is if you are looking to minimize yield, is VUG or VTI better? I understand that VUG has a lower dividend yield than VTI, but when folks refer to "dividend yield," are they also referring to capital gains? I would assume that VUG has to sell more often than VTI to track its index (that is, corporate stock can fall into and out of "growth" over time, whereas in general corporate stock never falls out of the total market), but does Vanguard's mutual fund / ETF structure flush out that capital gain so efficiently that I wouldn't expect to have significant capital gains yield through VUG? It'll be a long while before I have enough invested in the UTMA to have to pay the Kiddie Tax on the yield itself, but the lower the yield, the more strategic tax harvesting I can do in the meantime. (Tax gain harvesting is preferable to yield, because, while both create basis, tax gain harvesting creates basis blocks, whereas yield creates uniform basis, and basis blocks create more opportunities in the future for, e.g., donating low-basis shares, selling high basis shares, etc.)
"The answer to the ultimate question of life, the universe, and everything is....42" -- Hitchhiker's Guide to the Galaxy
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by nolesrule »

Peripatetic Investor wrote: Sat Jan 22, 2022 11:56 am
nolesrule wrote: Sat Jan 22, 2022 9:10 am
Ed 2 wrote: Sat Jan 22, 2022 8:59 am
RetiredAL wrote: Sat Jan 22, 2022 8:55 am My Grandkid's accounts (ages 3 and 6) hold only SCHB - Broad Market and SCHG - Large Growth.

Why 2 holdings? These are UTMA's and I gain harvest them between those 2 ETF's.
Why gain harvest? Do you realise they got 60+ years until they need money? :beer
Because by the time they get control of the accounts you can raise the cost basis by about $2000 per year. And they might want or need the money earlier than in 60+ years. The increase in cost basis means less capital gains consuming lower brackets when it comes time to sell.

That said, there's no need for 2 holdings with tax gain harvesting. I just sell and buy back in immediately.
I'm just about to set up an UTMA account for my child, which I'll initially fund with low-basis VBIAX from my taxable account, with the intention of tax gain harvesting that stock in the UTMA. Then I'm going to invest the proceeds from the tax gain harvesting into VTI (Total Market) and / or VUG (Growth), in order to minimize dividend yield, while tax gain harvesting THAT up to the Kiddie Tax limit each year ($2300, taking into account both gain and dividend yield). My question is if you are looking to minimize yield, is VUG or VTI better? I understand that VUG has a lower dividend yield than VTI, but when folks refer to "dividend yield," are they also referring to capital gains? I would assume that VUG has to sell more often than VTI to track its index (that is, corporate stock can fall into and out of "growth" over time, whereas in general corporate stock never falls out of the total market), but does Vanguard's mutual fund / ETF structure flush out that capital gain so efficiently that I wouldn't expect to have significant capital gains yield through VUG? It'll be a long while before I have enough invested in the UTMA to have to pay the Kiddie Tax on the yield itself, but the lower the yield, the more strategic tax harvesting I can do in the meantime. (Tax gain harvesting is preferable to yield, because, while both create basis, tax gain harvesting creates basis blocks, whereas yield creates uniform basis, and basis blocks create more opportunities in the future for, e.g., donating low-basis shares, selling high basis shares, etc.)
I don't think yield much matters, because reinvesting dividends is a form of tax gain harvesting in this scenario.

Also, in terms of the Kiddie tax,there are a couple things to keep in mind.

One, the $2300 of kiddie tax space is on all unearned income which might include bank account interest which is ordinary unearned income.

Second, ordinary unearned income (interest, short term capital gains and ordinary non-qualified dividends) is only 0% for the amounts below the standard deduction on unearned income. The unearned income standard deduction is $1150, but can shrink down to $400 with earned income > $750 or even be eliminated entirely with earned income that comes within $400 of or exceeds the standard deduction for single filers. Above the standard deduction and below $2300, there are parallel brackets for unearned ordinary income (10%) and LTCG/QDIV (0%) and they interact the same way the parallel brackets do for adults.
Peripatetic Investor
Posts: 61
Joined: Sat Nov 06, 2021 8:45 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by Peripatetic Investor »

nolesrule wrote: Sat Jan 22, 2022 12:12 pm
Peripatetic Investor wrote: Sat Jan 22, 2022 11:56 am
nolesrule wrote: Sat Jan 22, 2022 9:10 am
Ed 2 wrote: Sat Jan 22, 2022 8:59 am
RetiredAL wrote: Sat Jan 22, 2022 8:55 am My Grandkid's accounts (ages 3 and 6) hold only SCHB - Broad Market and SCHG - Large Growth.

Why 2 holdings? These are UTMA's and I gain harvest them between those 2 ETF's.
Why gain harvest? Do you realise they got 60+ years until they need money? :beer
Because by the time they get control of the accounts you can raise the cost basis by about $2000 per year. And they might want or need the money earlier than in 60+ years. The increase in cost basis means less capital gains consuming lower brackets when it comes time to sell.

That said, there's no need for 2 holdings with tax gain harvesting. I just sell and buy back in immediately.
I'm just about to set up an UTMA account for my child, which I'll initially fund with low-basis VBIAX from my taxable account, with the intention of tax gain harvesting that stock in the UTMA. Then I'm going to invest the proceeds from the tax gain harvesting into VTI (Total Market) and / or VUG (Growth), in order to minimize dividend yield, while tax gain harvesting THAT up to the Kiddie Tax limit each year ($2300, taking into account both gain and dividend yield). My question is if you are looking to minimize yield, is VUG or VTI better? I understand that VUG has a lower dividend yield than VTI, but when folks refer to "dividend yield," are they also referring to capital gains? I would assume that VUG has to sell more often than VTI to track its index (that is, corporate stock can fall into and out of "growth" over time, whereas in general corporate stock never falls out of the total market), but does Vanguard's mutual fund / ETF structure flush out that capital gain so efficiently that I wouldn't expect to have significant capital gains yield through VUG? It'll be a long while before I have enough invested in the UTMA to have to pay the Kiddie Tax on the yield itself, but the lower the yield, the more strategic tax harvesting I can do in the meantime. (Tax gain harvesting is preferable to yield, because, while both create basis, tax gain harvesting creates basis blocks, whereas yield creates uniform basis, and basis blocks create more opportunities in the future for, e.g., donating low-basis shares, selling high basis shares, etc.)
I don't think yield much matters, because reinvesting dividends is a form of tax gain harvesting in this scenario.

Also, in terms of the Kiddie tax,there are a couple things to keep in mind.

One, the $2300 of kiddie tax space is on all unearned income which might include bank account interest which is ordinary unearned income.

Second, ordinary unearned income (interest, short term capital gains and ordinary non-qualified dividends) is only 0% for the amounts below the standard deduction on unearned income. The unearned income standard deduction is $1150, but can shrink down to $400 with earned income > $750 or even be eliminated entirely with earned income that comes within $400 of or exceeds the standard deduction for single filers. Above the standard deduction and below $2300, there are parallel brackets for unearned ordinary income (10%) and LTCG/QDIV (0%) and they interact the same way the parallel brackets do for adults.
See my parenthetical above -- it's still better to reach the relevant thresholds through tax gain harvesting then through yield, because it's preferable to have basis blocks over uniform basis (just as its preferable to determine basis through SpecID rather than average cost). In any case, I generally understand the relevant thresholds -- the one question I have (and should already know, since I'm a tax attorney, albeit not a personal income tax attorney) is how the child's standard deduction interacts with STCG / ordinary income. Specifically, assume no earned income. If my child recognizes $2300 of income in the UTMA, $1150 of LTCG and $1150 of STCG, I ASSUME that he would pay no tax, since the standard deduction would offset the $1150 of STCG, and the LTCG are taxed at his 0% marginal rate for LTCG. Do I have that right? Or does the standard deduction somehow stack against the LTCG, leaving the STCG to be taxed at 10%?
"The answer to the ultimate question of life, the universe, and everything is....42" -- Hitchhiker's Guide to the Galaxy
Peripatetic Investor
Posts: 61
Joined: Sat Nov 06, 2021 8:45 pm

Re: Brokerage account for kids - what type of funds are ideal?

Post by Peripatetic Investor »

Peripatetic Investor wrote: Sat Jan 22, 2022 12:20 pm
nolesrule wrote: Sat Jan 22, 2022 12:12 pm
Peripatetic Investor wrote: Sat Jan 22, 2022 11:56 am
nolesrule wrote: Sat Jan 22, 2022 9:10 am
Ed 2 wrote: Sat Jan 22, 2022 8:59 am

Why gain harvest? Do you realise they got 60+ years until they need money? :beer
Because by the time they get control of the accounts you can raise the cost basis by about $2000 per year. And they might want or need the money earlier than in 60+ years. The increase in cost basis means less capital gains consuming lower brackets when it comes time to sell.

That said, there's no need for 2 holdings with tax gain harvesting. I just sell and buy back in immediately.
I'm just about to set up an UTMA account for my child, which I'll initially fund with low-basis VBIAX from my taxable account, with the intention of tax gain harvesting that stock in the UTMA. Then I'm going to invest the proceeds from the tax gain harvesting into VTI (Total Market) and / or VUG (Growth), in order to minimize dividend yield, while tax gain harvesting THAT up to the Kiddie Tax limit each year ($2300, taking into account both gain and dividend yield). My question is if you are looking to minimize yield, is VUG or VTI better? I understand that VUG has a lower dividend yield than VTI, but when folks refer to "dividend yield," are they also referring to capital gains? I would assume that VUG has to sell more often than VTI to track its index (that is, corporate stock can fall into and out of "growth" over time, whereas in general corporate stock never falls out of the total market), but does Vanguard's mutual fund / ETF structure flush out that capital gain so efficiently that I wouldn't expect to have significant capital gains yield through VUG? It'll be a long while before I have enough invested in the UTMA to have to pay the Kiddie Tax on the yield itself, but the lower the yield, the more strategic tax harvesting I can do in the meantime. (Tax gain harvesting is preferable to yield, because, while both create basis, tax gain harvesting creates basis blocks, whereas yield creates uniform basis, and basis blocks create more opportunities in the future for, e.g., donating low-basis shares, selling high basis shares, etc.)
I don't think yield much matters, because reinvesting dividends is a form of tax gain harvesting in this scenario.

Also, in terms of the Kiddie tax,there are a couple things to keep in mind.

One, the $2300 of kiddie tax space is on all unearned income which might include bank account interest which is ordinary unearned income.

Second, ordinary unearned income (interest, short term capital gains and ordinary non-qualified dividends) is only 0% for the amounts below the standard deduction on unearned income. The unearned income standard deduction is $1150, but can shrink down to $400 with earned income > $750 or even be eliminated entirely with earned income that comes within $400 of or exceeds the standard deduction for single filers. Above the standard deduction and below $2300, there are parallel brackets for unearned ordinary income (10%) and LTCG/QDIV (0%) and they interact the same way the parallel brackets do for adults.
See my parenthetical above -- it's still better to reach the relevant thresholds through tax gain harvesting then through yield, because it's preferable to have basis blocks over uniform basis (just as its preferable to determine basis through SpecID rather than average cost). In any case, I generally understand the relevant thresholds -- the one question I have (and should already know, since I'm a tax attorney, albeit not a personal income tax attorney) is how the child's standard deduction interacts with STCG / ordinary income. Specifically, assume no earned income. If my child recognizes $2300 of income in the UTMA, $1150 of LTCG and $1150 of STCG, I ASSUME that he would pay no tax, since the standard deduction would offset the $1150 of STCG, and the LTCG are taxed at his 0% marginal rate for LTCG. Do I have that right? Or does the standard deduction somehow stack against the LTCG, leaving the STCG to be taxed at 10%?
Total brain fart. Of course yield IS equivalent to tax gain harvesting since it just creates new basis blocks. BUT it is still better to invest in lower yield investments IF you expect at some point to cross into Kiddie Tax territory. I’m thinking of starting in VTI, but over time tax gain harvesting that into VUG.
"The answer to the ultimate question of life, the universe, and everything is....42" -- Hitchhiker's Guide to the Galaxy
hnd
Posts: 1077
Joined: Mon Jun 22, 2020 11:43 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by hnd »

I have a few accounts for the children that I don't really want to do anything with or manage and I just buy BRK.B in them. thats really it. It basically the past 10 years has matched VTSAX give or take and I've been happy with that.
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Brokerage account for kids - what type of funds are ideal?

Post by nolesrule »

Peripatetic Investor wrote: Sat Jan 22, 2022 12:20 pm Specifically, assume no earned income. If my child recognizes $2300 of income in the UTMA, $1150 of LTCG and $1150 of STCG, I ASSUME that he would pay no tax, since the standard deduction would offset the $1150 of STCG, and the LTCG are taxed at his 0% marginal rate for LTCG. Do I have that right? Or does the standard deduction somehow stack against the LTCG, leaving the STCG to be taxed at 10%?
Yes, within the $2300 it works the same way as the interaction of ordinary income and LTCG/QDIV for adults, where the LTCG/QDIV sits on top.
Post Reply