{The Age-Old Question}

By: Andrew Rosen, CFP®, CEP®

Speaking of kids, here’s a funny anecdote that happened to me the other day. My middle child, Belly, is a free-spirited six-year-old who hates wearing clothes. Now, she’s starting kindergarten remotely through zoom, so naturally she has to wear clothing. The other day she puts on a nice shirt, but she’s still in her underwear. “No one can see it,” she said. I couldn’t help but laugh. This is literally everyone’s dream at some point—showing up to school to realize you’re in your underwear.

Except in my house. In 2020, this is my new reality!

Now onto another nightmare situation for parents. We have all this money for our children, but what to do with it? The other day, friends and clients of mine asked me what to do with all these checks they keep getting for their daughter. It’s a great question and not always the simplest to answer. I’ll give you my best options and reasoning behind each. This way you can apply the best strategy for your children or grandchildren.

I’ll preface, as always, there are a lot of things that go into this decision. This isn’t a one size fits all recipe. But at very least, I hope this helps give you some direction. If you’d like some more clarity, I’ll be happy to assist.

Andrew’s Options:

529 Plans – The first logical spot for those checks is a college savings plan (aka, 529 plan). The reality is most of us won’t have enough money to pay for all of our children’s college outright, so every little bit helps.

The Pros – These dollars can grow in investment vehicles on a tax-free basis if used for higher education. They’re fairly flexible and can even be used interchangeably between children. Also, there can be some state tax benefits depending where you live.

The Cons – Although flexible, they’re still truly meant for higher education. If that isn’t your child’s route, or simply don’t need additional funding for college, then this is not the best option. Additionally, like in my client’s case, they looked at this money as belonging to their child for future usage however that child wishes. Putting it into a 529 plan really restricts that ability.

Savings/Checking Account – Probably the default option for most is opening up a banking account for their children (much like I did for mine). This gives ultimate flexibility and in my children’s case, there isn’t that much in there (don’t tell my oldest Aviva she thinks she is rich).

The Pros – As mentioned about, there are no restrictions on these dollars. It gives your child their own account in their name and can be a great foundational tool in learning about finances. It also can provide an easy vehicle for them to add to when they get that first job. Plus, there’s no market risk with these dollars (which is nice for some).

The Cons – Online high yield savings accounts right now are paying approximately .7% rate of return. Brick and mortar banks are paying next to nothing. If looking for a return, you may be better off putting it under your mattress. Additionally, if these funds get sizeable, colleges will look at them more stringently in regards to financial aid formulas.

Investment Account – I’m sure you didn’t see this one coming ?! If you got time and are ok with market volatility, this could be a great option.

The Pros – Obviously, the biggest pro is the growth potential, especially if you start early and are in it for the long term. If definitely not using the funds for college, or you want the flexibility, these are certainly more advantageous than a 529 plan. Again, it’s a real fun way to get your kids comfortable with the investing landscape early on, as in my experience being comfortable with market movements is likely the number one key to investing success.

The Cons – Much like a banking account in your child’s name, an investment account also will be looked at negatively when it pertains to college financial aid. There also are no tax advantages to you, or your child, in these types of accounts. They’ll be treated like any non-retirement investment account. The other thing worth noting is once your child is the age of majority in your state (18 or 21 usually), your children will have untethered access to these funds. Obviously, these funds will be volatile as they are invested in stocks, so buyer beware.

Investment Account (in parents name)- This is a fun one I’ve recommended on a number of occasions. Much like the option above, you can do the same thing, except instead of putting these funds in your child’s name, you can place them in your name. You’ll have to start a separate account earmarked for each child, but this can be a great solution. This also could be a great option for grandparents, as these funds are virtually invisible to colleges, and children, until they are ready to give them out.

The Pros– These funds are also unrestricted and have every bit of growth opportunity as any investment account. Additionally, they’ll be looked at as your asset for college aid, not your child’s, thus not as scrutinized for the financial aid formula. I know for some it’s also important to let their child know about these funds later in life and this preserves you controlling the timing of your children receiving these funds.

The Cons– For starters, you’re likely in a higher tax bracket than your children, so potentially you’ll have higher taxes on the gains. You’ll also have to maneuver any gift tax laws, although generally speaking in today’s environment, that won’t present too much of an issue. This method required being careful and assuring you keep the accounting of each account detailed to assure each child’s funds are separate.

Decisions, Decisions, Decisions

There certainly are many options of handling those funds for your child. You’ll have to weigh risk and reward, along with other variables. Do you want transparency, or a learning lesson for them? Is college a factor, or accessibility the main concern? Is it a lot, or a little amount, of money?

These are a few of the many variables that should go in the decision. I recommend really thinking about what you want for these funds. This’ll lead to an easier road map to making the right decision for you.

Stay wealthy, healthy, and happy.

In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. Andrew loves helping others by spreading his knowledge on finance, investments, and the pursuit of happiness/fulfillment. He writes nationally recognized, weekly blog posts on these topics and is a regular contributor to Kiplinger. Andrew has been published in The Wall Street Journal, Barron’s, Financial Advisor Magazine, US News & World Report, USA Today, CNBC, along with many other publications.

For more information or to book a consult with Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Andrew Rosen, CFP®, CEP®
Kyle Hill, CFP®
David Levy, CFP®

Financial planning and Investment advisory services offered through Diversified, LLC. Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC. Headquartered at 80 State Street, Albany, NY 12207. Purshe Kaplan Sterling Investments and Diversified, LLC are not affiliated companies.