Son’s 2nd birthday coming up.. thinking of opening a custodial account for him and buy a couple hundred dollars worth of a SP500 index fund and continue doing that on subsequent birthdays. Is it a good birthday gift? I understand the drawbacks of a custodial account (losing control once the kid grows up and it affects financial aid etc). I think it will be cool for him to see all the purchase dates fall on his birthdays and teach him about long term investment

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I think it is a good gift that will be appreciated down the road but please get him something else that he will appreciate now also. I don’t see his eyes lighting up when he opens the box and sees a copy of a brokerage statement

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I did something similar but chose individual stocks of companies they know so it would be a little more real to them.

You can also gift appreciated shares to them and save a tiny bit on taxes.

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Like Toys are Us

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Why do this instead of a 529?

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Recommend doing this outside of a 529 too. More flexibility in use

Check out EarlyBird - new fintech startup specifically designed for this. Allows you to set up custodial account that you, friends and family can contribute to for the child.

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I wish I had started doing this when my kids were young. Prefacing, we are wealthy (as in will pay estate taxes when we die wealthy). Anyway, if you are a typical consultant, even if you aren’t wealthy, the odds of your kid getting financial aid is very small so I would discount that. My kids 529’s were bad investment - significantly underperformed the market. Maybe we just picked a bad one - dunno. Now, I’ve opened each a custodial account and give them the max allowable without hitting the gift tax limit - dump it all in an index fund.

Mixed emotions if I should feel regret for not starting that when they were born - on the one hand they would have ha a lot more money prior to estate taxes, on the other hand, they could have gone down a bad path and maybe I wouldn’t have wanted them to have the money. As it is, they are decent kids with no glaring issues - but I wouldn’t have known that when they were littler.

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FWIW I've seen some analyses of target date investment funds in 529s that show they tend to outperform or perform at least at competitive levels until about halfway into their cycles, but the "conservative" cash preservation phase closer to the target date can significantly underperform even more conservative alternative investment vehicles. I'm not especially interested in individually directing my kids' 529s once they hit that point (still a few years away) but may just suck it up and do so.

Not really relevant for you at this point but if you have grandkids and want to invest in their 529s it can be good to know.

Why not do it in your own account and track in excel the close price as your cost basis.

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If you want to have control of it when he reaches age of majority in your state you could create a trust instead and title the account in the name of the trust, have yourself as trustee with power to appoint successor trustees and/or terminate the trust when you are comfortable with him having the $$ outright. Lot more to it than that but something to think about.

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You can do whatever you want with the trust if you appoint yourself trustee. And could be excessive in the sense of legal costs to create one, but I think not excessive in the sense of providing maximum flexibility versus a custodial account.

I think the custodial account is a good idea. Our son will be 2 next month and we’ve had the account since he was born and contribute monthly.

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are you also contributing to a 529?

You may also want to consider a EE bond from treasury direct. It is guaranteed to double its value in 20 years so maybe not the best investment but it’s risk free and most people open it for young children

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Buy him a mini electric car instead ffs.

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