Tax Free savings for my daughter' retirement?
Question:
My daughter is 3 years old and I want to start saving for her retirement. This might be a bit early. But "start early" is the key for the nest egg.
Anyway, I understand that since she is not earning, she can not have an IRA. I already have a 529 account for her. I want to separate out this retirement savings with her college savings. So can not put money in thta 529.
What is the most tax efficient way to save for her retirement. I do not want to buy I/EE bonds. Since, I will be putting money in stocks or stock funds.
Please advice.
Thanks a zillion
Answer:
There is only one way that I know of to save for her tax free. That would be to purchase municple bonds for here from within the state in which she lives. But that would not be the best option I do not believe.
I think the best option would be a tax deferred investment. Something she would not have to pay a great deal of tax on until she retired. That would be an index mutual fund. Since that type of fund is more or less a buy and hold fund there would be very little capital gains tax associated with it. There would however be taxes on the dividends that it might pay. There is a wide selection of such funds available idexed to everything under the sun. Those indexed to growth compies would not have much in the way of dividend but their values would tend to fluctuate greatly.
A very popular one is SPY with 52 billion is assets indexed to the S&P 500. Has of life of fund return of about 10%, not great but not too shabby either especially when it is tax deferred. It does pay a dividend of currently about 1.7%.
Assuming a 10% growth rate until she retires and an initial investment of $10,000 and reinvesting of the dividends less taxes, and if she is now 5 years old then at retirement she will have well over $6,000,000.
However, it might be better to split that $10,000 between several index funds. Say $4,000 in SPY. Say $1,000 in EEM an emirging markets fund with a growth rate of a whopping 35% since inseption. That will not last however. Say $3,000 in EFA a fund indexed to world stocks but free from the falling value of the dollar. And $2,000 in XLE a fund indexed to energy shares with a growth rate since inseption of about 15%
I'd worry about yours first. Shes got about 50 years to get herself situated for retiring, so use that money towards yours so she wont have to carry you later.
wow. that is very nice of you to save for her retirement. but isn't that really her responsibility? i understand saving for her college, but her retirement? if you do that, don't let her know, because then she may become overly reckless with money and not save, because she will, in essence, be a 'trust fund baby.'
You can't save for her retirement. She does not have earned income therefore cannot have a retirement account. You can create a regular brokerage account for her and invest that money in an UGMA/UTMA and she get's control of it at 18. LTCG rates are 15%. That's the best you are going to be able to do.
But really, you should put the money into YOUR account because she will inherit it when you die anyway and get the stepped up basis which is much better tax-wise. This way, if you need it you have it but if you don't she gets it.
Buy common stocks or ETFs and hold them. There is no tax unless you sell. Some have dividends which you, not your daughter until 18 (kiddie tax), report as income but since your tax on this portion is max 15% not much to worry about each year.
One other suggestion have the dividends reinvested in her holdings and you will be blown away how much she will have, in just a few years.
Couple things to keep in mind though the amount you can directly gift to your daughter is 12,000 for 2006 without filing an additional tax form. But if you are married your wife can also gift 12,000 so for 2006 you could give 24,000. This total will also include what you are contributing to her 529.
If you plan on more than 24,000/ year email me and I can point you in the right direction.
By the way your are teaching your daughter and others an awesome lesson. I wish more people would do it!
not for me...I want mine to learn the value of a dollar and expect them to get their own finances, the old fashioned way.
otherwise, they'll be weak and dependent.
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