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BouncyEgg t1_j2ex0nj wrote

Have you already hit the max or on track to hit the max on all of your available tax advantaged space?

Have you read the Prime Directive? Have you seen the Flow Chart?

Once you've done all that...

u/billthecatt has arguably the best answer to this question linked and pasted below:

Typical kid options:

529 - Great for college/education, but not all kids go to college/private schools, etc. More Details here: https://old.reddit.com/r/personalfinance/comments/mq0rjb/information_about_college_529_savings_plans/

UTMA (Custodial) - Invest on behalf of the child, Pros - lower taxes (assuming amounts don't get too high, see below), fewer restrictions on usage than 529. Cons - Is the child's money, so no takebacks. Minor takes full control at the age of termination (varies by state, typically 18 to 21). Also, will reduce/impact financial aid for college. You should tax gain harvest this type of account (realize gains periodically, while in the 0% tax bracket).

IRA (Roth/Traditional-Custodial) - Cons: Requires earned income, which most minors don't have or have much of.

Normal investment account in your name - Cons: Probably higher taxes than UTMA, Pros - you keep control

HYSA - Pros: Won't "lose" nominal value, low risk Cons: May lose out to inflation.

CD - Pros: Like HYSA, but with guaranteed returns over investment period. Cons: May lose out to inflation.

I-Bonds: Currently high-yielding bonds that can be purchased in accounts for minors: (up to $10k/year; interest changes every 6 months) /r/personalfinance/comments/qprqpy/ibond_questions_answered/

The first 4 options (529, UTMA, IRA, investment account) are account types that allow for investing based on your time horizon. If your child is young, a more aggressive investment mix may make sense for you (Stock ETFs/funds), and you may want to shift to a more conservative mix over time, depending on your goals for your child(ren).

More information:

UTMA Kiddie Tax Info: https://www.marketwatch.com/story/the-kiddie-tax-is-getting-easier-and-maybe-cheaper-under-the-new-tax-law-2018-05-24

UTMA Taxes: In general, in 2020 the first $1,100 worth of a child's unearned income is tax-free. The next $1,100 is taxed at the child's income tax rate for 2020. Anything above $2,200, however, is taxed at the marginal tax rate of the parent(s), which usually is higher than the child's rate.

Overfunding a 529 isn't so bad: /r/financialindependence/comments/hqexle/oversaving_in_a_529_is_a_much_smaller_problem/

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lolheisdead59 OP t1_j2f0219 wrote

No, not at all. The child hasn't been born yet. Given the fact that I'm military, our taxes are relatively low due to military pay.

I've never had to worry about maxing tax advantages, which has inevitably lead to screwups on my part with short term gains on my own brokerage account. I am keenly aware that once my wife and I transition out of the service tax advantages are going to be more important.

Thank you for this post. I will go through all of these resources.

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soullessgingerfck t1_j2fho60 wrote

> maxing tax advantages

any retirement/investment account that gives a tax advantage has a yearly contribution limit

so when they ask if you have maxed your tax advantaged space they mean have you put $20,500 in your 401k (TSP), $6,000 in a Roth IRA, $3850 in a HSA, $8000 in a 529, etc.

paying low to no taxes now isn't relevant, its the account that provides tax advantages now or in the future or both, regardless of your current tax situation

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