Brokerage account for kids - what type of funds are ideal?
Brokerage account for kids - what type of funds are ideal?
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.
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.
Re: Brokerage account for kids - what type of funds are ideal?
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.
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.
Re: Brokerage account for kids - what type of funds are ideal?
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.
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.
Re: Brokerage account for kids - what type of funds are ideal?
I have both my daughters in FSKAX.
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Re: Brokerage account for kids - what type of funds are ideal?
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.
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.
Re: Brokerage account for kids - what type of funds are ideal?
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.
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.
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Re: Brokerage account for kids - what type of funds are ideal?
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.
Re: Brokerage account for kids - what type of funds are ideal?
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.
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.
Re: Brokerage account for kids - what type of funds are ideal?
That's a great idea to tax gain harvest and increase the cost basis. Why didn't I think of that?
There are the haves, have-nots, and have-yachts.
Re: Brokerage account for kids - what type of funds are ideal?
This thread is now in the Personal Investments forum (account help).
Re: Brokerage account for kids - what type of funds are ideal?
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’sEurookat 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.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
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Re: Brokerage account for kids - what type of funds are ideal?
I take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.Ed 2 wrote: ↑Sat Jan 22, 2022 8:26 amSet 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’sEurookat 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.
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.
Re: Brokerage account for kids - what type of funds are ideal?
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.
Re: Brokerage account for kids - what type of funds are ideal?
Those you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial depositsaristotelian wrote: ↑Sat Jan 22, 2022 8:33 amI take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.Ed 2 wrote: ↑Sat Jan 22, 2022 8:26 amSet 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’sEurookat 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.
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.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
Re: Brokerage account for kids - what type of funds are ideal?
think you mean to say mutual fundsEd 2 wrote: ↑Sat Jan 22, 2022 8:37 amThose you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial depositsaristotelian wrote: ↑Sat Jan 22, 2022 8:33 amI take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.Ed 2 wrote: ↑Sat Jan 22, 2022 8:26 amSet 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’sEurookat 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.
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.
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.
Re: Brokerage account for kids - what type of funds are ideal?
Index funds are mutual fundsBUBear29 wrote: ↑Sat Jan 22, 2022 8:39 amthink you mean to say mutual fundsEd 2 wrote: ↑Sat Jan 22, 2022 8:37 amThose you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial depositsaristotelian wrote: ↑Sat Jan 22, 2022 8:33 amI take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.Ed 2 wrote: ↑Sat Jan 22, 2022 8:26 amSet 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’sEurookat 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.
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.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
Re: Brokerage account for kids - what type of funds are ideal?
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.Ed 2 wrote: ↑Sat Jan 22, 2022 8:43 amIndex funds are mutual fundsBUBear29 wrote: ↑Sat Jan 22, 2022 8:39 amthink you mean to say mutual fundsEd 2 wrote: ↑Sat Jan 22, 2022 8:37 amThose you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial depositsaristotelian wrote: ↑Sat Jan 22, 2022 8:33 amI take it that they don't have $3k for Vanguard's minimum. They would need to do a provider that has $0 minimum.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
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.
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.
Re: Brokerage account for kids - what type of funds are ideal?
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.
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.
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Re: Brokerage account for kids - what type of funds are ideal?
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.Ed 2 wrote: ↑Sat Jan 22, 2022 8:37 amThose you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial depositsaristotelian 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.
Re: Brokerage account for kids - what type of funds are ideal?
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 2 holdings? These are UTMA's and I gain harvest them between those 2 ETF's.
Re: Brokerage account for kids - what type of funds are ideal?
Why gain harvest? Do you realise they got 60+ years until they need money?
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
Re: Brokerage account for kids - what type of funds are ideal?
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?
Re: Brokerage account for kids - what type of funds are ideal?
Re: Brokerage account for kids - what type of funds are ideal?
+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. ))aristotelian wrote: ↑Sat Jan 22, 2022 8:50 amYes, 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.Ed 2 wrote: ↑Sat Jan 22, 2022 8:37 amThose you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial depositsaristotelian 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.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
Re: Brokerage account for kids - what type of funds are ideal?
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.
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Re: Brokerage account for kids - what type of funds are ideal?
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.Ed 2 wrote: ↑Sat Jan 22, 2022 9:03 am+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. ))aristotelian wrote: ↑Sat Jan 22, 2022 8:50 amYes, 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.Ed 2 wrote: ↑Sat Jan 22, 2022 8:37 amThose you mentioned are ETF’s . I meant Index funds. Index funds can be open at Fidelity or Shwab with even $0 initial depositsaristotelian 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.
Re: Brokerage account for kids - what type of funds are ideal?
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.nolesrule wrote: ↑Sat Jan 22, 2022 9:10 amBecause 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.
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.
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Re: Brokerage account for kids - what type of funds are ideal?
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.)nolesrule wrote: ↑Sat Jan 22, 2022 9:10 amBecause 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.
"The answer to the ultimate question of life, the universe, and everything is....42" -- Hitchhiker's Guide to the Galaxy
Re: Brokerage account for kids - what type of funds are ideal?
I don't think yield much matters, because reinvesting dividends is a form of tax gain harvesting in this scenario.Peripatetic Investor wrote: ↑Sat Jan 22, 2022 11:56 amI'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.)nolesrule wrote: ↑Sat Jan 22, 2022 9:10 amBecause 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.
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.
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Re: Brokerage account for kids - what type of funds are ideal?
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%?nolesrule wrote: ↑Sat Jan 22, 2022 12:12 pmI don't think yield much matters, because reinvesting dividends is a form of tax gain harvesting in this scenario.Peripatetic Investor wrote: ↑Sat Jan 22, 2022 11:56 amI'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.)nolesrule wrote: ↑Sat Jan 22, 2022 9:10 amBecause 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.
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.
"The answer to the ultimate question of life, the universe, and everything is....42" -- Hitchhiker's Guide to the Galaxy
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- Joined: Sat Nov 06, 2021 8:45 pm
Re: Brokerage account for kids - what type of funds are ideal?
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.Peripatetic Investor wrote: ↑Sat Jan 22, 2022 12:20 pmSee 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%?nolesrule wrote: ↑Sat Jan 22, 2022 12:12 pmI don't think yield much matters, because reinvesting dividends is a form of tax gain harvesting in this scenario.Peripatetic Investor wrote: ↑Sat Jan 22, 2022 11:56 amI'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.)nolesrule wrote: ↑Sat Jan 22, 2022 9:10 amBecause 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.
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.
"The answer to the ultimate question of life, the universe, and everything is....42" -- Hitchhiker's Guide to the Galaxy
Re: Brokerage account for kids - what type of funds are ideal?
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.
Re: Brokerage account for kids - what type of funds are ideal?
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.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%?