How Should You Give Money to Your Kids? | 529s, UTMAs, Trump Accounts & More

I feel that the White Coat Investor makes a compelling argument for fully funding the 530A account in this post:

Assuming that the parents are FI with more money than they need, why not transfer a relatively small amount of money to this account to give the child a multimillion dollar tax-free retirement account by the time they are at traditional retirement age? I'm surprised that Cody and Sean did not list this as one of the ideal use cases. If you wait until the child is a teenager to fund the account as they suggest, the potential value of the account is significantly reduced. Yes, there is currently only one provider (though Vanguard should be available soon https://corporate.vanguard.com/content/corporatesite/us/en/corp/who-we-are/pressroom/press-release-vanguard-to-serve-as-alternate-fund-partner-for-trump-accounts-070126.html), investment choices are limited, and the child would control the account at 18. But I feel these cons are far outweighed by the potential benefit. Am I missing something?

I keep thinking about this episode, and how much I've gotten out of past discussions from Sean and Cody. But this one missed the mark for me.

Throughout the FI and financial space, whenever things like 529s come up, a "maximalist or nothing" attitude takes over the conversation. I was detecting that here, and I find it perplexing.

After all, typically with Choose FI, we are all about the aggregation of marginal gains.

Yet discussions around 529s often center on these high-dollar contributions, or the idea that families are suddenly shoveling tens of thousands of dollars into the account, often to the detriment of other uses. That perspective gets in the way of both a great discussion opportunity and the utility of a financial tool that is far more flexible than it gets credit for.

529s can be for setting aside a little bit. It doesn't have to be "new roof or family vacation" money, to paraphrase. It can be $10 month.

It's okay to silo funds. We in the FI mindset silo funds into equities, typically for money we want to keep at arm's length for a growth period of at least 20 years. We silo funds into retirement accounts that may have penalties for early withdrawal. Technically, those uses have opportunity cost, just as the 529 does.

But just as with our brokerage and retirement accounts, the opportunity benefit of a 529 easily outweighs the opportunity cost, as long as a family keeps the right expectations and balance for their circumstances.

529 discussions get blindered into this "4-year college or university" track, and that doesn't accurately reflect what 529s can be used for. Those tax-advantaged funds can come into play for a range of educational expenses. Here's how Saving for College breaks it down:

You can use 529 funds for tuition, fees, books, supplies, room and board (for college), computers, equipment, and student loan payments at eligible educational institutions. The definition includes K-12 tuition and other expenses, up to $20,000 per year, unlimited college costs, trade school expenses, apprenticeship programs, and professional certification and credentialing costs.

Here’s a quick list of the most common qualified expenses:

• College tuition and fees (unlimited)
• K-12 tuition and expenses ($20,000 per year)
• Books and supplies (if required for courses)
• Room and board (college only, half-time enrollment minimum)
• Computers and internet (college only)
• Student loan payments ($10,000 lifetime limit per borrower)
• Apprenticeship programs (registered with Dept. of Labor)
• Professional certifications and licenses

A 529 doesn't have to fund four years of sticker-price university to be useful.

Typically in this community, we'd discuss any progress as being worthwhile. EG, if one year you can't fully fund your IRA, that doesn't mean you shouldn't bother at all. It means you do what you can.

A 529 is no different.

Every bit helps. The account is more than flexible enough to cover to a range of educational expenses, not just college tuition.

Overall, I really appreciate the perspective and all the insights the guys brought. But I wish this discussion had more of the nuance of incremental benefit that we usually bring to the table here.

This was a really interesting episode. One thing I wish would have been covered (maybe I missed it) is if there are any actions to consider with the funds already in a 529 account. Luckily most of the contributions are under my name rather than my kids, luckily I learned that a couple years ago, but should I be looking to transfer the funds from my kids to my name? I’m sure there are limits on that, I’ll have to look into it.

Also, I live in Indiana (which I heard referenced once in the episode). They offer a state income tax credit of 20%, so I’ve been contributing $7,500/yr to claim the maximum credit of $1,500/yr. Should I reconsider doing this moving forward?

I love Cody Garett's content. Will listen on a road trip tomorrow.

I hope they include hiring your kid as a W-2 employees for those with some self-employment income, as well as the annual tax-free gift amount ($19k).

I also hope they address WHEN to gift. My kids have (2) Roth accounts. One they know about and are learning to invest in, with $300 each. And the OTHER one, which I'll tell them about when they are 30 OR if they accidentally find a piece of mail or see it somewhere.

Great deep dive on this topic. Appreciate the analysis especially on the Trump account as has been a lot of speculation when in reality the fact that there’s only one provider should really scare people away outside the seed money.

I was pretty surprised by some of the advice on this podcast and it's making me reconsider my priors a bit!

We're in our early 40s, have 3 kids under the age of 7 and have been plowing money into 529s as the primary place we direct money outside of retirement accounts (we both max out 401ks). If we have $500K in brokerage accounts and very healthy retirement accounts, do we need the flexibility talked about on this episode as a reason NOT to fund 529s? Feels like we've got the brokerage money for all the financial curveballs (big hospital bill, new roof, etc) and really we can cover that through emergency funds.

Our rationale has always been, with 3 kids, at least 1 and probably at least 2 will go to college. So putting enough money away to cover 2 of those and get the state tax break + gains growing tax free feels like a no brainer.

This episode threw me for a loop (and happened to direct me to the site to register, first time poster!), so need a bit of a sanity check.

530A/Trump accounts: After interrogating AI about what they're good for, the only real use I found for my kids ages 10, 12, and 15 is to have my employer contribute directly. This avoids FICA. May not even both with that. Aside from that, it seems the worst of both worlds. A Roth for contributions and a Traditional for withdrawal…very odd.

Another high quality episode with Sean and Cody.

Too many people (particularly in financial media) treat all these account options as "shiny objects" that "everybody needs to get in on" lest they "miss out." This is actually how nasty products like life insurance for children or burial insurance are marketed and sold. It's also how financial advisors often justify high fees for essentially shuffling paper (or digits) and creating complications for complexity's sake – "I can set up an UTMA and a 529 for you! And maybe a trust or two!"

But just because some kind of account exists does not mean its the right choice for you. Often the best choice is just "simple and boring but keeps all of our options open", like just saving/investing extra for the kids' futures in an an ordinary brokerage account. Or accounts – you can put your kids' names on them if that makes you feel better.

As Sean alluded to, many of these accounts and strategies only make sense for people in really high tax brackets who are looking for additional ways to shelter W2 income after they have maxxed out their other options. For people in the 12% federal or even the 22%, the value of them is often dubious or chimeric. And it can be very counterproductive if its essentially robbing from retirement savings or creating inflexibility.

The first question should thus usually be, "what tax bracket am I in", and not "what is the advertised purpose of this account do and where do I sign up."