Child Opportunity Accounts

Nate Crosby |

Two Ideas for Child Opportunity Accounts Beyond 529 Plans

Parents and grandparents routinely ask what the best way is to invest for children. 529 plans are college/education savings plans that allow parents and grandparents to invest money for children. While contributions to 529 plans are not tax deductible, money can be withdrawn without incurring capital gains tax if the money is used for qualified educational expenses. However, if money must be withdrawn for any reason other than educational expenses, capital gains taxes must be paid as well as a 10% distribution penalty. While 529 plans can work very well when utilized for education, since life needs routinely change, parents may find the potential tax savings may not be worth pigeon-holing the money for a singular purpose. What are the best options for child opportunity accounts that do not limit the purpose of the money? The answer to that question depends on when the child will need the money.

  • Short to Mid-term Opportunities - Non-Qualified Custodial Accounts are great for teaching a child about investing. The accounts are in the child’s name, which helps add ownership in the child’s mind, but a guardian’s name is added to the account while the child is a minor. The account can be invested as conservative or aggressive as the guardian desires. The guardian always maintains 100% penalty free access to the account. These are true opportunity accounts in that the child can use the money for educational expenses, starting a business, purchasing a house or anything their heart desires. Taxes will be paid on any capital gains that occur within the account. There are no minimum or maximum contribution limits.
  • Long-term Opportunity - Minor Roth IRAs enable parents to set their kids up for advantages in their retirement years. It operates similar to the Non-Qualified Custodial in that a guardian’s name is added to the account while the child is a minor. Roth IRAs allow for after tax contributions, but they money can growth tax free and be 100% withdrawn tax free in retirement years. Consider $200 per month growing at 10% per year for 50 years would result in a tax free 3.3 million dollars! Maximum contributions for investors under the age of 50 is presently $6,000 annually. Contributions can be withdrawn from the Roth IRA anytime without penalty, the investor must be over the age of 59 ½ to withdrawal gains tax-free.

Do your capacity and resources currently support your long-term goals?

“Do you currently have the operational capacity, resources, and products to meet your target goal?" I have heard our own Carly Snyder, of CAG Marketing ask business owners that question. As entrepreneurs, we are often big picture thinkers and pay less attention to the nuts and bolts of our operation. A business owner had a goal of tripling income over a five-year period but in an analysis meeting Carly showed him the odds of achieving that goal with their current operational capacity and addressable market was unlikely. It wasn’t until Carly introduced the idea of product offerings that allowed for recurring income did the goals become realistically attainable. 

Not surprising I often see a lot of similarities between retirement planning and business growth. “I want to retire with $2,000,000 of assets by age 65.” However, when you examine the savings rate and growth of the chosen investments, we may find the resources and products don’t support the attainment of the goal. Clients have heard me many times say that we need to reverse engineer our goals. By starting with the goal and working backwards it becomes evident what we need to do to achieve the goal. Then it becomes a matter of tracking to ensure we remain on pace and adjusting as needed. 

e-bikes now have coverage….from some companies

The consumer’s needs change and the insurance industry adjusts, though sometimes painfully slow. E-bikes or electric bikes are growing in popularity (try not seeing one on the bike path!). Their popularity caught the insurance industry off guard as they were not covered under the homeowner’s policy and also not covered under the personal auto policy. Companies like Erie Insurance have led the charge to updating the policy language of their homeowner’s product to provide coverage. If you own an e-bike and are unsure if your policy provides coverage, please contact our office today. 

Disclaimer: This newsletter is for informational purposes and should not be taken as direct investment, marketing or insurance advice without a consultation. Keep in mind investing involves risk including potential loss of principal.  Understand all risks and fees before investing. Not all investments are suitable for all investors.  Crosby Advisory Group, LLC and Nate Crosby have ownership interest in NMD Insurance and CAG Marketing.

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