I did not know about the SECURE Act and now being able to use up to 10k from a 529 to pay off student loans! I always learn something from you and the other Money Guy team, thank you!!!!
Thanks for the info. Did not know about the ABLE account. Great new info. I would like to start saving for my grandchild. His parents make a large income so college will be covered. I can't set up a ROTH as he is only 3 months old. How can I start saving for his retirement without the account passing to him at 18?
Instead of a custodial brokerage account you could consider contributing to a taxable brokerage account in your name. This would give you more control over the account, however the account may be taxed at a higher rate since it is in your name (you can choose more tax-efficient investments to counter this somewhat, like index ETFs).
If you do want to pass the assets on through inheritance instead of gifting while living, your grandchild may receive a step up in basis, which is certainly a benefit worth considering.
Can you explain how taxes work more with the custodial brokerage accounts? Do I invest dollars from my paycheck post taxes and then when/how does the tax-benefit come into play?
Yes! All money invested is post-tax. They work similarly to a normal taxable brokerage account. Once your child turns 18, investment income and short-term capital gains are taxed at their ordinary income rates. While they are under 18, the first $1,100 in income is tax-free, the next $1,100 is taxed at the child's rate, and amounts over $2,200 are taxed at the parents' rate.
That's how investment income (dividends, interest, etc.) is taxed. Long-term capital gains are subject to more favorable rates. They are subject to the same rules, but just swap out ordinary income tax rates for long-term capital gains rates. So the first $1,100 is tax-free, next $1,100 is taxed at the child's long-term capital gains rate (usually 0%), and long-term capital gains over $2,200 are subject to the parents' LTCG tax rates.
Keep in mind these tax rates are for investment income and LTCG the account generates, NOT on the account value. The account could be worth $20,000 and only generate $400 in invest income every year, all of which would be tax-free while the child is under 18 (assuming they have no other income/investment income). And the LTCG only comes in to play when you sell assets. To minimize taxes you can invest in assets that do not generate a lot of investment income and in assets you will buy and hold.
I did not know about the SECURE Act and now being able to use up to 10k from a 529 to pay off student loans! I always learn something from you and the other Money Guy team, thank you!!!!
Yet another great article on a relevant topic in my life. Keep up the good work Daniel!
Thanks for the info. Did not know about the ABLE account. Great new info. I would like to start saving for my grandchild. His parents make a large income so college will be covered. I can't set up a ROTH as he is only 3 months old. How can I start saving for his retirement without the account passing to him at 18?
Instead of a custodial brokerage account you could consider contributing to a taxable brokerage account in your name. This would give you more control over the account, however the account may be taxed at a higher rate since it is in your name (you can choose more tax-efficient investments to counter this somewhat, like index ETFs).
If you do want to pass the assets on through inheritance instead of gifting while living, your grandchild may receive a step up in basis, which is certainly a benefit worth considering.
Can you explain how taxes work more with the custodial brokerage accounts? Do I invest dollars from my paycheck post taxes and then when/how does the tax-benefit come into play?
Yes! All money invested is post-tax. They work similarly to a normal taxable brokerage account. Once your child turns 18, investment income and short-term capital gains are taxed at their ordinary income rates. While they are under 18, the first $1,100 in income is tax-free, the next $1,100 is taxed at the child's rate, and amounts over $2,200 are taxed at the parents' rate.
That's how investment income (dividends, interest, etc.) is taxed. Long-term capital gains are subject to more favorable rates. They are subject to the same rules, but just swap out ordinary income tax rates for long-term capital gains rates. So the first $1,100 is tax-free, next $1,100 is taxed at the child's long-term capital gains rate (usually 0%), and long-term capital gains over $2,200 are subject to the parents' LTCG tax rates.
Keep in mind these tax rates are for investment income and LTCG the account generates, NOT on the account value. The account could be worth $20,000 and only generate $400 in invest income every year, all of which would be tax-free while the child is under 18 (assuming they have no other income/investment income). And the LTCG only comes in to play when you sell assets. To minimize taxes you can invest in assets that do not generate a lot of investment income and in assets you will buy and hold.