Bank account for toddler?

[mercyngrace]

Not sure if this is the right place to ask, but looking for options for a bank account for my 18 month old son. I’m an E-5 with 7 years TIS, if that matters at all.

A lot of recommendations are for a 529, however from my understanding that’s mainly used for education benefits (please correct me if I’m wrong). I plan on transferring my GI bill to my son, so if he decided to go to college he will be atleast the majority of the way covered. If a 529 is still the way to go I’m definitely open to it, just seeing if anyone else has any other recommendations.

 

[tsundoku]

@mercyngrace The answer depends on your intent for money you'd contribute to such an account.

Is it a long term investment for their retirement? If so, 529 plans recently were updated to allow a rollover into an IRA (up to $35k lifetime limit), so you could start a 529 now even if you're not sure it'll be used for education. There are also ways to establish a custodial IRA for a minor if they have earned income - I wouldn't advocate for the extreme examples (e.g. a self-employed photographer pays their baby for marketing/promotion) but once your child gets old enough to walk dogs, rake leaves, etc. it's a straightforward option.

If this is more just to establish a financial foundation and educate/familiarize them with banking as they get older, you should be able to open a custodial/joint bank account like a HYSA.

 

[mercyngrace]

@tsundoku I would say it’s more the first thing you mentioned. Maybe not necessarily for retirement, but I would say something that has the potential for that. I plan to educate my kid/s on finances as early as I think they can understand it. So I’m hoping this will be something that when he turns 18 or whatever age I think he is smart/responsible enough with money, I can turn the account over to him and he can do as he pleases. Whether that’s education, save for retirement, use for his own kids, etc etc.

 

[tsundoku]

@mercyngrace Definitely sounds like a bank savings account is the best option. As others mentioned, Navy Federal is a good place for this: https://www.navyfederal.org/resources/family-finances/youth-finance.html

The guys at MilitaryMoneyManual did a podcast in the last couple years on financial literacy for children (guests did come on and advertised an app they made - I checked it out and do plan to try it with my kids when they're older), might be useful to you: https://militarymoneymanual.com/ep60/

 

[mercyngrace]

@tsundoku Appreciate it!

 

[mansour]

@tsundoku I second this comment. I opened 2 custodial accounts through Schwab for my kids and when they turn 18 it will be transferred to them. Every 1st and 15th I put $50 into an SP500 ETF.

 

[nairna]

@mercyngrace We opened accounts at navy federal for our kids and 529s through my home of record state. Birthday money etc. goes to Navy Federal (which I have been putting into CDs). We contribute $100/month/child to the 529s, which we can take a tax break for when we file state taxes.

 

[mercyngrace]

@nairna That doesn’t sound like a bad plan. My HOR doesn’t charge me state income tax, so I wouldn’t get any tax benefit from that, correct? Or is there some type of federal benefit I could get instead?

 

[tsundoku]

@mercyngrace Correct, no federal benefit, just state income tax exemption for 529 contributions.

 

[nairna]

@mercyngrace Yeah its only state. Ours is no longer taxing mil pay starting this year so 529 doesnt give tax bennies any more but it will help our kids with college.

I gave each one 12 months of GI Bill that I will use to cover their final year and then 529s or loans etc for everything else.

 

[o2blikehim]

@mercyngrace Personally I think the suggestions given by others are not the best. Putting money in a savings account, especially at Navy Federal or most regular banks, you’re losing money to inflation. Even with high yield savings account you would be too. Then there can be tax implications on interest earned.

My plan is to open a brokerage account at Fidelity that will be solely my kid’s money. Setup automatic deposits into this account and leave it invested in a total market index fund. I heard some of the brokerages will do a joint account with the kid and the parents, not sure if it’s the case but I’m not too worried. Once the kid turns 18, I’ll just gift them the money in the account since current tax law dictates they won’t pay any extra taxes unless I’m giving them more than $13.6 million. Tax laws can change, but I’m not too worried about it.

 

[boymom925]

@o2blikehim I’m with you, but I don’t have kids. What we do have though, are nieces and nephews. When they were each born, we set them each up with a custodial brokerage account. Every Christmas and on their birthdays, we deposit cash into their accounts, and then invest it in index funds. We’ll get them something small like Legos or a Barbie or whatever, because when you’re three, index funds aren’t that cool. When they’re 21, we’ll hand over the accounts, then they’re free to do whatever they want at that point.

 

[mariavontrapp]

@boymom925 This is a good idea.

 

[nothinges]

@mercyngrace If you're looking to start a nest-egg for your kid and don't want the strings of a 529, open a Uniform Transfer to Minors Account (UTMA).

They'll pay income tax on the cost basis, but when starting out at 18-21 years old their income is going to be in the 10 or 12% tax bracket (after the standard deduction), which is better than 15% long-term capital gains and better than paying your marginal income tax rate on a savings account all these years. They could of course let the account sit more, but the tax advantage of this account goes away as they earn more money later in life.

To use an example: Let's say you lum-summed $10,000 and it grew at 6% average annual return to $28,000, for an $18,000 profit. Let's also say your child is working part-time at $15/hour for a total of $18,750 of income. Subtract the standard deduction of $14,600 and your child has $4,150 of wage income. In this case, he could withdraw $6,000 of the profit each year ($9300 total) to stay in the 10% tax bracket or if he doesn't mind the extra two percentage points of tax he can lump sum withdraw it to use as he sees fit.

If you're just looking to teach the child how to manage money... when you kid turns about 12-14 or so, they can open up a savings account with your bank.

 

[mercyngrace]

@nothinges I think I’m going to go ahead and open up a UTMA. I don’t plan to put a ton of money in it, as I’m prioritizing my own retirement savings and to be honest just transferring my GI bill I believe is setting him up pretty good anyways by allowing him to earn a bachelors degree with zero student debt. But anyways, I would like him to have some money when he comes of age. Whether he decides to use it as part of a down payment for a house, save it for his own retirement, blow it on cookies and pop tarts, whatever.

 

[grace000]

@mercyngrace I have a savings for my daughter that I opened for her around that age. We just called NavyFed and asked what we needed. I honestly forgot what they asked us for but the phone call was super quick and easy.

We also have a 529 for her that we’re contributing at the max tax deductible amount for our state. Leftover funds can be transferred/rolled over to an IRA at a max of $35k per beneficiary. 529 can be used for educational expenses (private school, university, trade school, room and board, books, equipment required for school). You can also change beneficiary to another relative like a future sibling, or grandchild.

If you plan on giving your son your GI Bill, you can look into UGMA/UTMA.

 

[mariavontrapp]

@mercyngrace I opened a taxable brokerage account for my son shortly after he was born through Fidelity. We invest around $400 a month (each) into the S&P 500 equivalent Mutual Fund. Additionally, any tax returns we receive goes directly into that account. Thinking about putting it in an irrevocable trust at some point. Nevertheless, our goal is to educate him on finances and prepare him for financial independence.

 

[booklady]

@mercyngrace Also don’t forget some states offer free college to dependents who had legal guardians who served AD. (California and Texas) so check your state of residence.

Prior to Navy I had a 529 college fund running for my son for a good while but then I stopped it and created an ACORNS account for my son instead.

 

[williamfrawley1887]

@mercyngrace Absolutely get a bank account. One at a brick and mortar facility. Helps develop good habits.

 

[ayrus87]

@mercyngrace I am in a similar boat (transferred GI bill to my only child). What we have done is opened a UTMA through Fidelity, and this is where I put all Christmas/birthday gift money given from family. I also plan to contribute open a 529 soon with the intent to later roll into their IRA, but I would not recommend this option if you aren’t already maxing out your own retirement accounts first.