Putting money in the stock market has traditionally been a great way to grow your money over the long term. There are many different options to consider when investing from setting up a brokerage account, fee-based money management, using mutual funds and ETF’s, and numerous other products. Many of these programs allow parents to help save for college, and also offer different ways to structure those college savings accounts. There’s the 529 plan, which in Arizona is sponsored by Fidelity, Uniform Gift to Minors (UGMA) or Uniform Transfers to Minor (UTMA), which are basically very similar. The only difference is that the UTMA can hold virtually any type of investment including real estate, unlike the UGMA. While assets made into these accounts are irrevocable (they belong to the child), parents have control up to 21 years old. Remember that these accounts can affect financial aid because the assets are considered in the name of the child and can count more heavily against the availability of aid.
While the account structures discussed previously make-up a large number of the college savings for kids, I feel that there is another often overlooked program, Dividend Reinvestment Plans. Many years ago. Whether it’s for college or to get started for yourself, you can purchase 1 share or a few shares of stock directly through a company like Coca Cola or Johnson & Johnson, and then get enrolled in the reinvestment program. You can also do this through brokerage accounts, or services like Computershare.com or DirectInvesting.com, but make sure that you understand any possible fees. The great news was that any time the company paid a dividend you were able to have those automatically reinvested into more shares of stock. Additionally, you can add on a consistent monthly basis, or anytime for that matter, with smaller dollar amounts. I realize that this is a “set it and forget” approach to investing which can have its ups and downs, but this is also a great way to buy good, dividend paying stocks and let the market work in your favor over the long term. Most importantly, you will be surprised how much money you can build by adding and compounding. Another thing that proved very useful was that we got our kids involved by having them pick a company that they liked, my son wanted Nike and my daughter chose Johnson & Johnson, purchasing it and enrolling in the reinvestment program. It was a great way to explain how stocks work, and they have fun tracking it. As parents we need to take an active role in teaching our kids about finances. You also get statements with your accounts, so it is easy to track your results. With our kids, the statements are additional teaching tool as well.
When setting-up the account, you have rules to follow for a minor. You can set-up a joint account and manage the account until the child is an adult. What social security number determines who is responsible for any taxes. With children, they are usually in a very low tax bracket, so there usually isn’t much. Also, parents can use the child tax credit to help further offset possible taxes when claiming kids under 17-year-old as a dependent. For college purposes, a DRIP account in joint account registrations has the same eligibility requirements, an account in a child’s name counts heavier against financial aid formulas, while parental assets are counted less against college aid. Finally, you can encourage grandparents, other family members, etc. to put money into these stock accounts to help them accumulate more shares.
Setting up a Dividend Reinvestment stock plan can be another great way to save for you, your kids, or even give stock as a gift (giftastock.com). High quality, dividend paying stocks are a big portion of the Standard’s and Poor’s (S&P 500) index, and often comprise companies that we know and are established. It can be a great teaching tool, and a fun way to start investing that usually is very affordable.
- Mr. Moran is a managing partner for American Financial Literacy Institute (AFLI), an educational financial service company, and managing partner with Moran, an investment planning firm. Pat has 30 years of investment planning experience and can be reached at (602) 571-1035 or visit aflinstitute.org for more information.