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What’s the best method to save money for a baby?

Assume I can afford to save a small sum ($25-$75) every month. What’s the best investment vehicle? I would hope to amass a significant sum by the time the child is 25 years old.

Extra points for convenient and simple methods. I am not looking to earmark the funds for college expenses.

After doing some research I think my best option might be a Brokerage Fund with automatic investing like Fidelity Go. Is there a better approach?

  • How old will you be when the child is 25? Why is saving for college not an option? Does your work offer any matching retirement or an HSA? – D Stanley Mar 11 at 1:14
  • I’m new here, please help me edit my post to best fit the site. – LN6595 Mar 11 at 1:35
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    Is your goal that the money irrevocably becomes the child's when they turn 25 with no strings attached? Do you want to retain some control to dispense the funds earlier or later (knowing that lots of 25 year olds are going to be really poor stewards of large windfalls)? Do you want to explicitly avoid earmarking for college (which potentially has some nice tax savings) or are you open to that option but that's not a requirement? – Justin Cave Mar 11 at 1:51
  • Only a little joking: a case of wine or port of the birth year vintage. – user662852 Mar 11 at 4:09
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    @Jonast92 That sounds like the furthest thing possible from "convenient and simple". – chepner Mar 13 at 14:49
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Since you don't want to use the account to save for college, you can either setup a regular brokerage account for yourself and gift the money, or setup a UGMA/UTMA.

The brokerage account means you have full control of the money and the child has no claim on it, ever. Once you want to give money to the child, you can simply withdraw and gift it. You will have to keep the gift tax in mind. Assuming you are married, your spouse and you can each gift $15,000 (total $30,000). Any amount over that would reduce the lifetime exclusion.

UGMA/UTMA accounts are setup with the child as the beneficiary, and do include some small tax benefit. However, once you put the money in the account it is no longer yours, but the child's. They don't have access to it until the Age of Termination, which is 18 for UGMA and 18-25 for UTMA depending on the state you live in. You can technically withdraw money early from the account, but it has to be "for the benefit of the child". (e.g., you can pay for the family vacation, but just hope your child doesn't sue you for it once they're older...). Note that once the child does reach the Age of Termination, the assets become theirs and you no longer have any control over it. More reading here

Note that Vermont and South Carolina do not allow UTMA accounts (for whatever reason).

If you really are just saving money to give to the child in the future, a UGMA or UTMA account is probably what you want due to the small tax benefit. Since the money is technically the child's, it is mostly taxed at the child's rate. Here is some more info, including the tax benefits:

  • Up to $1,050 in earnings is tax free
  • The next $1,050 is taxed at the child's rate [often zero or at least much less than the parent's tax rate]
  • Any earnings over $2,100 is taxed at the parent's rate.

Note that the tax is on earnings. Contributions to UTMA/UGMA accounts do not get any tax deduction.

Any of these three allows for the typical investment choices. Although, a UTMA account also allows other things like real estate, expensive art, etc.

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  • Thanks. What is the tax advantage of a UTMA? – LN6595 Mar 13 at 18:00
  • @LN6595 added to answer – Nosjack Mar 16 at 13:07
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If the investment is put into the child's name then they get control of it at 18 years old.

The $50 a month for 18 years is $10,800. The good news is that the small amount of money per-month can be put into most anything because discount stock brokers have gone to zero commissions. The simple answer is to get a discount brokerage account.

However since the risk here is a small amount of money, I would invest in leveraged situations. Long-term stock call-options or stock-index futures-contracts are one example. Mortgage-REIT's are another example. Holding the Russian Ruble or the Mexican Peso in a leveraged forex account for the rollover-interest is an example.

The small amount of money could acquire gold bullion for the fundamental of a decreasing supply of gold or could acquire platinum bullion for the fundamental of the increasing importance of platinum as a hydrogen catalyst. Well, a small amount of money holding precious metals at home is a simple answer or it can be done most incrementally with a brokerage account. Also, there's no taxes as the wealth accumulates.

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    Any reason why you suggest these holdings instead of tried and true index funds? – Nosjack Mar 11 at 15:04
  • Because of the small amount of funds, I suggested holding stock indexes with futures contracts. Or in an economic downturn, hold individual stocks, that have particular prospects, with long-term call options. Or hold the company that is widely known to the locale and do that for the feeling of emotional support. – S Spring Mar 11 at 18:51
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    Recommending leveraged forex gambles for 25 years is near-criminally poor advice. – Grade 'Eh' Bacon Mar 11 at 19:04
  • Holding a $10000 forex position with a $1000 margin deposit is too much leverage. But holding a $5000 forex position with a $1000 margin deposit is less leverage than most mortgage-REIT's use. And five-times leverage is less leverage than most stock option-holders use. But the ruble and the peso pay high interest against the currency volatility. Emerging market currencies are currently in a downturn but Russia is buying the ruble and possibly buying the ruble for the next six years. And Mexico has an oil hedging program in its favor. – S Spring Mar 11 at 19:46
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    @SSpring "5x less leverage than most stock option-holders use" yes but leveraged stock options are also on the incredibly risky end of things. If you want to possibly teach your child the lesson that risky investments can go 'poof' in the night, by all means do this. – Grade 'Eh' Bacon Mar 13 at 14:03

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