Should You Set Up an Investment Account for Your Child?

Should You Set Up an Investment Account for Your Child?

Author: Tyler McCain
Tyler graduated from Georgia State University in 2019 with a bachelor’s degree in finance. He is a former Wealthy Habits instructor.

At this point, we have discussed child whole life policies and 529 plans in articles on the Wealthy Habits blog. In those articles, I referenced a third option for saving for your child’s future – creating an investment account. There are many advantages to this option, but it does not provide the tax benefits present in child whole life policies or 529 plans.

Let’s look at the advantages of investment accounts. The first is that since you have complete control of the account, you can create a more fluid dialogue with your child about the investments and even allow them to suggest investment options for a small percentage of the assets. This is a huge plus, as you will not be managing this account forever. By getting children interested in investing in the markets now, they will be more likely to continue to pay attention to the markets and their personal finances in the future.

When it comes to opening an account for children, you will typically see two options. The first is an UGMA (Uniform Gifts to Minors Act) account. With this account, you can deposit funds for securities purchases. The account becomes the child’s at either age 18 or 21, depending on your state.

There are some minor tax benefits to setting up an UGMA account compared to holding the assets in another account and dispersing them to the child at age 18 or 21. Specifically, the first $1,050 of unearned income is tax-free, and the second $1,050 of unearned income is taxed at the minor’s tax rate. All earnings beyond that are taxed as capital gains and passed on to you. Overall, this results in tax savings over holding your child’s assets in your personal investment account.

The second option that you might see is an UTMA (Uniform Transfers to Minors Act) account. The primary difference between these two accounts is that under an UTMA, you can transfer more than just securities, including patents, real estate and art. You can also lock these assets away until a child is 25 years old.

Once an account is open, it is time to decide exactly how to allocate the money. If your child is an infant and you plan to put more money into the account each year, it might be beneficial to create a more aggressive allocation. As your child ages, you are going to want to protect some base level. As this protection is needed, you can lower the overall risk through purchasing blue-chip stocks or fixed-income assets.

Another important thing is to get your child involved in the allocation of the account. Parents who have allowed their children to make decisions on allocations have said that that their children share financial articles and do legitimate research on companies and the stock market. Getting children interested now could save a lot of grief and misunderstanding as they get older.

At Wealthy Habits, we teach teens about planning for the future by making smart financial management decisions.  Another session of Wealthy Habits online courses are starting in October.

What You Need to Know When Choosing a 529 Plan

What You Need to Know When Choosing a 529 Plan

Author: Tyler McCain
Tyler graduated from Georgia State University in 2019 with a bachelor’s degree in finance. He is a former Wealthy Habits instructor.

When it comes to saving for your child’s future, you have several options. You could set aside money in an investment account to purchase blue-chip companies, open a whole life policy for your child, or create a 529 plan for education expenses. These are not all the ways to save for your child’s future, but they tend to be the most common. Since our last article on this topic covered the concept of Child Life Insurance, let us dive into 529 plans and how they might play a role in setting your child up for success.

 

At its core, a 529 plan is a savings and investment vehicle designed specifically for educational expenses. There are two types of 529 plans: savings plans and pre-paid plans. With 529 college savings plan, you deposit post-tax dollars that are invested for you. When it is time for your child to enter college, they can make tax-free withdrawals from the account for education expenses. The second type of plan is a 529 prepaid plan, which allows you to pay in-state tuition at a public college or university. These plans allow you to lock the tuition payment to that point in time, potentially helping you or your child save money on the cost of higher education.

 

One thing to note with 529 plans is that they are run by individual states. Some states have minimum contributions, while other states offer tax incentives to in-state contributors. A common question I hear regarding 529 plans is whether the plan you choose needs to be in your home state or the state where your child might go to college. The answer to both of those questions is “No.” You can create a plan in any state. These plans can be purchased directly from the state instead of through an adviser, which should mean lower fees for you.

 

Between the two plans, the 529 college savings plan is far more popular. It is much more flexible and if you are starting this account for your children early in their lives, you want as much flexibility as possible.

 

Speaking of versatility, what happens to the money in a 529 plan if a child doesn’t go to college?

 

Many parents hope their children will enroll in college and be successful students, but that does not always happen. Funds within a 529 plan do not need to go toward the costs of a four-year university. They can be used for virtually all education expenses. If your child enrolls in an associate’s program or at a trade school, these funds can be used to further learning and provide a head start on a career.

 

Of course, some students complete high school and are done with their education. If this happens, you can change the beneficiary of the 529 plan to a family member or friend who is going to college, or even use it for your own education. You can change the beneficiary of the funds on an annual basis. The last option would be taking the money out of the account. If you select this option, you will need to pay taxes on all earnings in the account plus a 10-percent fee for not using the money for education.

 

529 plans are a fantastic way to help children get a head start in life by either eliminating or shrinking student loan burdens. The average student loan debt is hovering around $30,000 for a bachelor’s degree. Reducing this stress from a child’s life could allow them to focus more on their studies and less on how they are going to pay for those studies. This can be more of a gift than providing access to money after graduation.

 

At Wealthy Habits, we teach teens about planning for the future by making smart financial management decisions.  Another session of Wealthy Habits online courses are starting in October.

Are Child Whole Life Policies A Good Investment?

Are Child Whole Life Policies A Good Investment?

Author: Tyler McCain
Tyler graduated from Georgia State University in 2019 with a bachelor’s degree in finance. He is a former Wealthy Habits instructor.

Depending on what you read, a life insurance policy for your child is either the best decision for your child’s future or detrimental to it. When you search “child whole life policies” on Google you are inundated with articles by the same companies that sell the policies, and you get biased information as a result. At Wealthy Habits, we are committed to unbiased education for both students and parents, and today we are going to explore both the positives, negatives and alternatives to opening a whole life policy for your child.

Let us first start with an explanation of what a whole life policy is. A whole life policy, or straight life policy, is simply a policy that is guaranteed to remain in force for the entire lifetime of the insured (your child). Of course, all premiums must be paid on time for the policy to stay in force. If one or more premium payments are missed, the policy is forfeited and all money put into the policy now belongs to the insurance company. A whole life policy will accumulate cash value as you pay premiums, which allows it to act as a savings vehicle with a death benefit attached.

One of the most common arguments you will read in favor of child whole life policies is that you will be able to lock in your children’s ability to receive life insurance as they get older. We all know that as you age, you are at a greater likelihood of contracting a disease that causes you to be too high of a risk for insurance companies to provide coverage. Being able to get insurance regardless of health condition is extremely valuable, especially as children begin to build their own lives and families.

What is not said, however, is that this guaranteed insurability is not only for the same carrier, but for the same product. In the event your child wants to add more coverage at a different company, one that may offer better optionality or a higher death benefit for the same premium payment, your child will still need to go through the underwriting process. This same goal can be achieved if your child purchases a term-life policy at age 25 to 30, when policies tend to be inexpensive, and converts it into a guaranteed policy after the term is complete.

The other primary upside to a whole life policy is the savings options typically embedded within the policy. Historically, the rates you would get as a guarantee would be considered high by today’s standards. However, as rates have fallen and remained low since 2008, your guarantees are not nearly as enticing. That said, whatever earnings that are present in the policy are tax-deferred until they are withdrawn.

A whole life policy for your child may very well be the best option. That said, there are other savings or investment vehicles that accomplish the same goal of putting money aside for your child’s future. These each accomplish different end-goals for your child.

The first, and most common, alternative is a 529 plan. With a 529 plan, you put money into the account, which is then invested. This money can be used for any education expense – typically college. However, a 529 account can also be used for private primary education. The most attractive aspect of these accounts is that all growth that happens in the account is tax-free, allowing you to maximize your child’s college fund. There is more to these plans, but I will go into that topic in more detail in a later article.

If you are looking for an option that extends beyond your child’s education, creating an UGMA account could potentially be the best option. There are none of the tax benefits present that are found in both whole life insurance and 529 plans. However, you are likely to get higher returns than a savings vehicle, including an insurance policy. There is also no required usage of the funds, unlike the 529 plan.

Of course, we can teach your children about topics such as investing and savings, too. Another session of Wealthy Habits online courses are starting in October.

What is a 401(k)?

What is a 401(k)?

When you enter the working world or change your job, one of your first matters of business is setting up a retirement such as a 401(k) plan. But what exactly is a 401(k)? Let’s explore the answers to some common questions.

What is a 401(k)?

A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paychecks before taxes are deducted. Taxes aren’t paid until the money is withdrawn from the account.[1]

Why is it called 401(k)?

401(k) is the tax code that governs this type of investment plan. 401(k) plans were created as supplements to pension funds that many employers offered in the past. Those funds were managed by the employer and paid out a steady income over the course of retirement.[2]

Why is 401(k) different and better than an IRA?

401(k) plans are workplace retirement accounts. Your employer may assist with contributions as a part of your plan. IRAs, or individual retirement accounts, allow account holders to own many different assets within the account, including stocks, bonds, certificates of deposit (CDs) and even real estate. Some assets, such as art, are not permitted within an IRA, according to IRS rules. 401(k)s are your better choice if you will receive assistance from your job to add to your retirement account balance.

Additionally, the maximum contribution for a 401(k) is much higher than an IRA. Current 2020 maximums are $19,500 for a 401(k) and only $6000 for an IRA.

What’s the difference between Roth and Traditional retirement plan?

Both IRA’s and 401(k)’s typically offer a Roth or Traditional option. The biggest difference between the two options is when you pay tax on the income you have contributed and if you will pay tax on the earnings.

With a traditional retirement plan, your contributions are tax-deductible in the year they are made. However, as you make withdrawals in retirement you will pay your current income tax rate at the time of the withdrawal.

With a Roth, your contributions are NOT tax-deductible in the year they are made. In short, you paid tax on the money before putting into your Roth retirement account. However, your withdrawals in retirement are tax-free. This includes any growth you have earned.

How do money savvy people make this work for them? Understanding the tax bracket you are in now and the one you might be in during your retirement, will help you to determine which is best for you. An example, for the younger generation that has a long time for their money to grow and is typically in a lower tax bracket, a Roth is a great option

How does the match work?

There are some great companies that will match whatever funds you place in your account. Here are the three most common types of contributions:

Matching contribution – your company matches the contribution that you make to your 401(k) account up to a specific threshold.

Partial contribution – your employer contributes a fraction of your contribution, and your employer’s total contribution is capped as a percentage of your salary.

Dollar for dollar – an employer’s contribution equals 100 percent of an employee’s contribution, and the employer’s total contribution is capped as a percentage of the employee’s salary.[3]

Where is the money typically invested, and is it safe?Where your money is invested is up to your discretion in accordance with what your retirement plan offers. There are typically several options to choose from, including mutual funds. This is completely up to you and your financial adviser. There isn’t a one-size-fits-all here and your plan can be completely customized for your comfort.

What happens if you die?

When you set up your retirement accounts, the person you choose as your beneficiary will receive your retirement funds. (So make sure that you keep your beneficiary current.)

Now that you know more about 401(k)s, it should be easier to plan for your financial future. Feel free to consult with your financial advisers for further assistance.

References

1 https://guides.wsj.com/personal-finance/retirement/what-is-a-401k/#:~:text=401(k)%20plans%2C%20named,the%20course%20of%20the%20retirement

2 https://www.investopedia.com/ask/answers/12/401k.asp

3 https://www.forbes.com/advisor/retirement/what-is-401k-match/

Things parents need to know before teaching their kids about investing

Things parents need to know before teaching their kids about investing

The following blog was written by SEONG  RYOO, our 2020 Summer Instructor and rising senior at Emory University pursuing a BBA in accounting, Finance and Accounting.

Investing is always one of the most popular camp topics at Wealthy Habits.

Here are some basics we want parents to know before starting their investing journey:

Being young is a huge advantage when it comes to investing. Being young means that you have more time to make more profit, and you have more time to learn from mistakes at less cost.

The recipe to build wealth is no longer a secret. The ingredient needed for you to become wealthy is time. Time is something that even the richest person in the world cannot buy. It is something even the smartest person on the Earth cannot invent. Time is extremely valuable in investing because it is the basic law of growing the profit from an investment. Investment is like a snowball rolling down the side of the mountain. It gets bigger at a faster speed as the snowball has been running down the slope for longer. And this is why it is more advantageous to start investing early. The younger you are, the more time you have.

No one can guarantee that you’ll always make a profit from your investment. Sometimes people make mistakes, and kids have the advantage to fix them. They can learn from past mistakes and make better investment choices in the future. It is easier to fix a mistake you made when you are younger and have relatively fewer responsibilities than when you are older and have a family and other obligations. You can learn from your mistakes at a cheaper price when you are younger.

Investing is a double-edged sword. There are certainly benefits to investing, but it is important to understand the risks. A clear benefit from investing is that you can build wealth without having to work for it. The negative aspect of investing is that you may lose money. Some investors get addicted to investing and spend most of their day looking at the graphs and following the stock market. Some investors leverage more than they can handle and fall into huge debt. Investing can be very dangerous if it is done irresponsibly.

Investing is more than just buying an asset. Investing is a mental game that involves a lot of emotion. It requires confidence in your research and your decision-making as well as devising and sticking to an exit plan. Check out our blog that explains why buying low and selling high is harder here.

Endurance is important in investing. Remember that it takes time for your investments to grow, so don’t let your feeling get the best of you. Don’t make irrational decisions because you are happy or scared. As if you are growing a tree, there will be sunny days and rainy days before you will be able to taste its sweet fruit.

Making decisions is an extremely crucial part of investing. You should never just follow other people and jump on a bandwagon. Those people will not be responsible for the consequences of your action. You should always do your own research, build your own opinions, and make your own decisions. Because you are the one who is taking on the responsibility, you should be in charge of all of your investment decisions.

Investing is not speculating. Many people confuse investing with gambling. I agree that both investing and gambling have uncertainty in common. However, investing and betting are different because you can manage and adjust the level of risk when you invest, and investments have a higher chance of success than gambling.

I want to share a line that I always keep in mind when I think about investing: It is not the smart one making a profit. It is the humble and disciplined one making a profit.

If you’d like your child to learn more about investing, check out our programs for one that fits your family’s needs.

Lessons Learned from Going Virtual at Wealthy Habits

Lessons Learned from Going Virtual at Wealthy Habits

Like so many other educational programs, Wealthy Habits had a choice to cancel programs or go virtual. Our mission is to educate students so it wasn’t a tough decision, but our staff was not under any illusion that it was going to be an easy feat.

From the very start, we’ve worked hard to ensure our programming makes teaching financial literacy as fun as possible through hands-on learning, relevant conversations, fun review games and eye-opening activities.

Until this summer, this has always been done in person. Translating what has worked in person, to remote, computer-based instruction seemed almost impossible.

Three of us spent two full weeks (including nights and weekends) focused on altering the current camp curriculum, deciding on and understanding the technology, and switching from local to nationwide marketing of our classes and camps.

We learned some good lessons while switching from in-person to online instruction that may be helpful to teachers, parents and students for the coming school year. Here are a few of them:

Simplify. Make technology and access to class materials easy. No matter how well everything is set up, there will be issues like bad internet connections, unresponsive websites, dead batteries and invalid passwords.

Tricks we learned:

  • Zoom has worked for us. We tried Zoom because of its reviews at the time. It hasn’t been without its issues but in all honesty some of those were likely due to user error.
  • Technology isn’t meant to last for many years. Our router was five years old and because it was furnished by our internet provider, it took some convincing to get it replaced. Once it was replaced, our slow and spotty connection was much less of an issue.
  • Make sure you have a good and preferably hardwired connection to the internet and other devices. Wi-Fi and Bluetooth are great for some things but aren’t always reliable. We had wireless speakers that would work some of the time and not work others.
  • A few weeks in, we had five classes going simultaneously. It was extremely helpful to have “mobile workstations” that were all set up the same. Each station had its own computer and extra monitor, Zoom account, speakers, other computer peripherals and whiteboards.
  • We needed lots of screen space. The smaller the screen space the less you can see and the harder it is to manage your lessons and your class. We used two full-size screens. One was so we could see all the students and the other was for the lessons.
  • When the camera is on, show your face and smile. It really does make a difference

 

Make it fun. This sounds so much easier than it actually is, but it isn’t impossible.

  • Remember to be age appropriate. My college-age child was watching her professors do some really “not-so-funny” funny stuff.
  • If you want kids to stay engaged, add a little competition. Talking to a screen of blank faces isn’t fun for anyone. We have one prize at the end of each program that the kids compete for.
  • Teach the class as if students are in the room with you. Get them talking. They like sharing their opinions or showing what they know. Not all kids are comfortable sharing and we call on the shy kids periodically to make sure they are still paying attention.
  • Try to find a dedicated room to go to, set a schedule and stick to it just as you would with an in-person session.
  • Use breakout rooms for kids to work on projects together. The Zoom breakout rooms were a lifesaver. For example, we have a Warren Buffet play that we developed that requires us to divide students into two groups. We encourage each group to be creative – dress the part, set the stage, etc. The instructors can end the sessions when they want, which brings all students back to the main session. The kids then present to the other group and instructors. The best play wins extra points.We use breakout rooms because they allow the kids to talk among themselves without feeling as uncomfortable. The instructors can pop in and out of the breakout rooms to check on the kids’ status.
  • We encourage the use of chat function. Not all kids like to talk to a screen, so we mix up some activities with the chat box. It registers the first person to hit send so it can be a great way to integrate competitive learning.
  • Going virtual meant we had to find an alternative to the workbooks we give the kids to keep everything together. A lot of teachers use Google Slides but we settled on liveworksheets.com. We like liveworksheets.com because we could upload our existing PDFs and add interactive pieces to them, instead of remaking each page.
  • Review games are a fun way to make sure kids understand the information and to show them that learning can be fun. Kahoot!, Google jeopardy and many other tools are easy to set up. During in-person camps, we try to stay away from technology, so these online games have been easier for us to use for our virtual camps. We even have a public Wealthy Habits Kahoot! game. Feel free to check it out.
  • Embrace the pros of teaching virtually. We have fewer behavioral issues in our virtual classes than we do in person, we can teach students from all over the country and even from other countries, and students can take classes in their homes, which is more convenient for some families.

For many of us, virtual learning will be part of our immediate future. We were fortunate to have a few weeks to make the switch to online learning. Many teachers were forced into it overnight. I hope some of the lessons we learned can help teachers, parents and students make the best of the situation. If we can make financial literacy fun, even online, then there’s hope for everyone else.

To see for yourself, check out our online camps and programs at WealthyHabits.org.

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