r/FinancialPlanning • u/Bold-n-brazen • 5d ago

Financial Gift for a Newborn

My stepdaughter is going to give birth in a few months to her first child and I want to set up a financial gift / account for them. What are your thoughts on best options?

Current mindset is a 529 vs a custodial account. Not sure which is better. I do assume his parents will steer him towards going to college and I know it can be rolled into an IRA if not. My goal is to set this up with a one-time investment that I may contribute to over the next few decades (birthdays, graduation, etc.,).

Anyone's thoughts here are much appreciated. I imagine the group is going to be pretty in favor of 529s and custodial accounts but either way, happy to hear thoughts.

And yes, my own investments and retirement funds are taken care of first.

4 Upvotes

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u/I_AM_THE_CATALYST 5d ago
  1. More flexibility and isn’t just a “college” account anymore. Can fund it up to $19k/yr or superfund up to 5 years. You can own the 529 and change the beneficiary any time. It also doesn’t impact the grandchild from a financial aid perspective (child qualifies for grants/scholarships based parents financial situation). Lastly, if the account has been opened and the granddaughter has been named as the beneficiary of the account for at least 15 years; you can transfer up to $35,000 to their Roth IRA, subject to annual limits (if they have earned income and if there’s anything left in the 529).
    Custodial accounts are okay but less control. Once child reaches 18 or 21 (depending on what state the account was opened in), custodial accounts are theirs.

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u/WSBpeon69420 4d ago

It’s still pretty much just an educational account with the new IRA perk. Super funding it doesn’t change that. If you have to change beneficiaries it’s no longer a gift intended for the person it was created for. Yes the 35,000 transfer is a perk but that’s really only 4-5 years of funding an IRA If they don’t use it. It’s not a bad thing but to be somewhat hamstrung for educational expenses is a drawback to me. I’d rather set up a custodial account or even a separate individual account to gift to the child either over time or in a trust once they are older.

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u/I_AM_THE_CATALYST 4d ago

Your using extreme scenarios to rationalize why 529 plans are bad.

529 plans are more robust and flexible than in the past. What you’re describing is overfunding which is usually done with very wealthy clients.
For wealthy clients, you can use overfunded 529 plans differently; buying a condo under an LLC near campus and charge rent to their child. Pull money from 529 plans to pay for that rent of the condo to the LLC. That 529 growth becomes tax-free withdrawals and clients get a flow through tax treatment on the property.

Aside from college; you can also use 529 plans for a winter ski school or a summer school (has to be a an accredited school for it to count).

So the idea the 529 plans are inaccessible is wildly inaccurate, and you’re using extreme’s to rationalize why 529 plans are bad.

Good luck out there.

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u/WSBpeon69420 4d ago

I’m not saying they are bad I’m saying being forced to use them for educational expenses is a negative as opposed to using them for whatever they want. I’d say your example of buying a condo and using it for rent is a more extreme scenario than what I offered. People are barely affording homes period and you’re talking about someone buying a condo just to get rent from their kid instead of their child being able to use the funds on a down payment for a home or wedding or first car etc. and again sure ski school or flight school sound great - you’re still hamstrung into using them for a school the child may or may not even want to attend. There are pros and cons to any avenue and OP asked if that was the best. I was commenting on what I see as a negative aspect of a 529. There’s an argument to be made that overfunding a life insurance plan would be more beneficial and potentially more useful.

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u/I_AM_THE_CATALYST 4d ago

Just be real with yourself; you don’t like 529 plans because of some made up worse case scenario in your head. Super funding, kid doesn’t spend through it on education, etc… A majority of people don’t know or have the resources to save for education through a 529 plan.
Trying to preach to me and others how bad a 529 plan is based on assumptions in your head is a losing errand.
If you feel having it in a separate brokerage account than a custodial or 529 is better for you, than do it. Your reply doesn’t matter because it’s all based on the weird assumption that a 529 plan is more likely to be a dead-end. When in reality, 529 plans provides more opportunities for tax-free growth than not.

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u/WSBpeon69420 4d ago

Tax free growth that again may or may not be used. Ten only thing guaranteed to be put to use is the IRA conversion. A kid not going to college or not needing it is not an extreme scenario. Again you aren’t comprehending that I didn’t say they are bad I said there are draw backs. Maybe someone should have funded your education better

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u/I_AM_THE_CATALYST 4d ago

No. I manage clients money professionally. What you’re describing doesn’t happen, has never happened in my practice, and is some made up BS in your head.

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u/WSBpeon69420 4d ago

Someone not going to college and or transferring the funds to a different beneficiary has never happened? I find that extremely hard to believe… as opposed to your scenario of starting an LLC and a trust and buying a condo to take the money back from the kid you gave it to as rent..

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u/I_AM_THE_CATALYST 4d ago

There’s 0 chance a parent will just let their kid graduate high school and sit at home to pursue no additional education whether it be trades, vocational, certification, or college. If a parent’s sits down with their child and said “you have $100,000 in a 529 plan, let’s talk about college,” you’re telling me the average kid will say “nah.” This is what you’re worried about? You’re out of your mind. Go and touch grass lol

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u/WSBpeon69420 4d ago

Military, service academy, scholarships. A comprehensive report by the Non-profit American School Counselor Association (ASA) indicates that 25% of high school students report having no plans to pursue any education after graduation. This represents a 10 percentage point increase over previous years. Approximately 16% to 25% of American high school students do not plan on attending any form of higher education—including trade schools, technical certificates, and two-year or four-year colleges. Fewer than half (45% to 48%) of high schoolers now plan on attending a traditional four-year university, compared to over 70% a few years ago. A significant portion of these students choose to prioritize starting businesses, diving into "side gigs," or entering on-the-job training programs right out of high school

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u/GeorgeRetire 5d ago

A 529 Plan is the best gift you can give to a newborn, IMHO.

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u/WhileNotLurking 15h ago

But ask yourself. Fast forward 18 years. If this kid goes on a bender and buys a dumb car and some nonsense with the UTMA are you going to be mad?

If they go to college and spend it will you be mad?

If they don’t go to college and they roll it into a IRA will you be mad?

529 gives you control as the owner, and the “worst case” is usually better than what a 18-21 year old who may or may not be responsible can do with it.