Investing for Your Kids
How Do I Set Up an Account?
Investing for Your Kids
You want to set up an account for your child. You can do that at banks, mutual fund companies, or brokerages. You can't, however, find all things at all places. For example, banks may or may not have mutual funds available.
Wherever you do go, however, there's a better than even chance that you'll hear some conflicting information and even some misinformation. Perhaps because there are so many choices, and because accounts for children make up such a small percentage of these institutions' business, lots of representatives are ill-informed.
One discount brokerage we called, for instance, told us that there's really only one way to invest for your child: create an UGMA account, with yourself as custodian. She knew nothing about guardian accounts, and mentioned nothing about the education IRA until we pressed it. Then she offered to go find someone who might know, and returned shortly thereafter to report that while it is true that such things exist, "We don't offer Education IRAs, and we don't know who does." Neither did a large bank around the corner from Fool HQ.
Another brokerage said: "If you want to invest for your children, you have two choices. Either you invest online, or by the phone." Another informed us that you can deduct the $500 a year you put into an Education IRA (which is wrong), and that "there is no difference between a custodian account and a guardian account" (wrong again).
When we called a large mutual fund company, we were told that $500 was both the maximum and the minimum annual investment for their education IRA. In other words, they lock you in to exactly that amount. They also said that you could choose from any of the mutual funds in the company's stable (hundreds of them, no doubt!). Another mutual fund company told us that they wouldn't offer a Roth IRA -- you could only set that up through a bank.
There are two points to be made here. First, arm yourself with information before you call, and second, what you hear (such as the "$500 minimum as well as maximum" statement) may be constraint created by that particular financial services company, not by the government. Financial institutions understandably offer these products in whatever form they feel will be profitable for them. This means that you'll find different products offered in different places, and once you decide what you want, it may take some hunting before you find an institution that can provide it for you.
So our suggestion would be to decide here on what you're looking for, then begin calling for it.
You'll be sent the relevant forms. If you don't already have an account at the institution, then of course you'll fill out an application. They're going to ask for the usual exciting information: Your name! Your physical street address! Social security number and citizenship! And -- get this! -- employment information! If you're applying to a brokerage, they'll want to know if you're associated with any financial industry or if you're affiliated with any publicly traded company -- if you're a 10% shareholder, or policymaker.
You get the idea. The difficult part isn't filling out the form. It's knowing what to ask for before you call up.
And now, in Step 7, we'll look at a few sample scenarios.