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One of our core goals at The Motley Fool is to help people become great investors, and the earlier a person starts on that path, the better his or her long-term results are likely to be. That's why we consider it a smart move to get your children -- or any younger relatives -- involved in stock picking while they're still children.
To that end, in this Rule Breaker Investing podcast, David Gardner has gathered a whole panel of Fools to discuss the best ways for folks to get started. David, along with Naima Barnes, Daniel Messeca, Robert Brokamp, and Jason Moser, will offer up tips, advice and a host of personal anecdotes about how they guided their kids into the world of Wall Street, and how they were led into it themselves.
In the first segment, they tackle the question of where to start with the youngest investors, with a focus on 529 Plans, Uniform Gift/Transfers to Minors Act accounts, Coverdell accounts, and more. They'll also weigh how the culture and internal dynamics of your family may play into which type of account you'll think is best for you and your children.
A full transcript follows the video.
This video was recorded on Jan. 2, 2019.
David Gardner: The real purpose of this conversation, Jason, is to get people younger than we are -- not just us, but others -- started investing. And I want to start with you because you've often talked about how you got your daughters started investing. Let me start because I'm hoping for a little bit of a chronological swing to this conversation. We're going to start with getting young -- like really young -- like maybe newborns starte d, and then get through to the Marine Corps grads of our lives.
Jason, did you start with your daughters at age zero, one, 12? How did it start?
Jason Moser: I like that idea. Let's start with the chronology. There's no better place than when they're newborns. I still remember pretty well when my kids were born. I have two daughters, 12 and 13 years old now -- almost 14, I guess, at this point.
It all goes back to what the ultimate goal is, because even if we're talking about investing for kids, there's still a goal in mind, whatever your goal is. If we're adults and we're investing, typically that's because we want to fund our retirement. What's the goal for the child?
As soon as they were born, my wife and I were both onboard with making sure we had some way to get some money saved up for them for college down the road with the understanding that that's not getting any cheaper and also understanding that time really is the investor's best friend. Our goal, in that regard, was to get a nest egg started for higher education when that times comes.
Right when they were born, David -- I think we got their Social Security numbers the next day -- I opened up 529 accounts for both girls immediately. We funded those accounts with just an initial $500 and then set it up so that every month there was an automatic deposit, a very minimal automatic deposit, that goes into each 529. It's not something that we even really feel. I know that we're very lucky that my wife and I both have jobs that can help fund that.
The point is that for every month of their lives, from this point until they reach college age, they're going to have a small monthly deposit that goes into that 529. What we've seen over the course of time of 12 and 13 years is it's pretty amazing what just a little bit every month can do. And we talk a lot about the magic of compound annual growth and it really is magic, and the longer it goes the more magical it seems. For our purposes with newborns, the goal was to fund higher education. That's how we got them started.
Gardner: That's great, Jason. So with that goal orientation and really starting as early as possible, you got a great head start on their behalf when they were born.
It's interesting because we all have probably different approaches and that's part of what we're going to reflect. We're going to reflect some motley to what we're doing. But for us, also with kids, I just started them with custodial accounts. It wasn't toward 529. And I have to say, in some sloppy ways I'm sorry to say we never really did 529 plans in our family.
Both of these are definitely ways to save for kids and get them started investing, and I know a lot of your journey and your story, Jason, and we'll get there a little later, are what to say to kids once they're of age. The conversations we have. The culture that we create around our families. But Naima Barnes, you're part of our conversation, today. You have a deeper understanding of these kinds of types of accounts and some of the reasons behind them, so I wanted to turn to you next and just ask you to introduce yourself briefly and then let's get some of the nuts and bolts, there, of how to actually get kids started investing when they're too young to even know themselves.
Naima Barnes: My name is Naima. I work in Motley Fool Wealth Management as a paraplanner. There's two main types of custodial accounts. Both came from different laws that were put in place a while ago. One is the Uniform Transfers to Minors Act, also known as the UTMA. The other is the Uniform Gift to Minors Act, also known as the UGMA.
Gardner: I think I did a UGMA -- an uhg-mah. I think I did. Sometimes people think that surely David Gardner or Tom Gardner, the co-founders of The Motley Fool, would know everything about money, but the truth is I hope Tom and I are constantly letting people know we don't know that much, and so this is something I didn't even realize. What's the difference between those two things?
Barnes: The difference is that with one of the accounts, the UGMA, if I'm not mistaken, you can include real estate. I'm looking at Bro to confirm.
Robert Brokamp: Yes. This is Robert Brokamp of the Motley Fool Answers podcast and the Rule Your Retirement and Total Income services. It really depends on which state you're in. That determines which one you'll be opening up. The basic point is that minors can't own investment accounts, so it has to be a custodial account with an adult's name on it and your state will determine which one you open up.
Barnes: And then from there Grandma or Grandpa or a guardian or parent are going to open that account for their newborn or anyone up to the age of majority, which depending on your state could be 18, 19, or if they're in college 24. Then they'll be able to purchase, if they please, individual stocks, real estate, bonds. With a 529, normally you're utilizing funds that the 529 custodian is going to say if it's available.
Gardner: So 529 plans are directed toward an educational outcome, as Jason was mentioning earlier. We've covered UTMA, UGMA, 529s. Are there other accounts that we should be thinking about as parents or mentors, or do those pretty much capture it?
Barnes: Those are the big ones. Also, a parent can open a Roth IRA for a child, but that is if you have earned income. So if your child has a summer job and they make the IRA limit amount, which varies on the year, then they can contribute that much for them. You can also use a Coverdell account. With those usually the maximum that you can contribute is lower than that of a 529 or an UGMA/UTMA. The gifting maximum for those varies depending on the year.
Gardner: So Naima, I'm hearing you describe these different accounts and I'm trying to put myself in the seat of our listener. We've done a good job talking about the possibilities. How do you open one of these?
Barnes: There's a bunch of different custodians you can use. You can go to places like Charles Schwab or Fidelity. You can also look at strictly online brokers like E*Trade and Ally Invest. Robinhood is really popular, but Robinhood at this time doesn't offer custodial accounts. They only offer individual accounts. I did find out that Stash, which is another app that you can use, offers custodial accounts so you can begin saving for a child on their online platform.
Brokamp: As you listen to all this, you might be wondering which one you choose, and I would say it starts with the goal you have for the money. If you want to teach your kid about investing while also saving for college, the 529 and the Coverdell are the way to go. The big difference, there, is with the Coverdell you can buy individual stocks and with the 529 you can't. I think that would influence it.
But if you're trying to get your kids started with a nest egg that they can control for decades, then I would look at the custodial or the Roth. The Roth is better if they have the earned income. We opened a Roth for my teenage son after he started a job as a lifeguard. But if they don't have earned income, you've got to go with the custodial. The drawback to that is once they reach the age of majority, it's their money.
Barnes: So they can buy a sports car if they want.
Brokamp: They can do whatever they want with it, and from a financial aid perspective, if you're looking that far down the road for college, having money in a Coverdell or a 529 is better than in a custodial account. So that's something you want to factor into that, as well. But if you're looking to really get the kid started and have them take over the portfolio someday, I would say the custodial or the IRA is the way to go.
Gardner: That's really interesting. Each of us can think back to when we did start investing. As I asked at the top of the show, some of us did so as adults. Some of us did so as kids. I had a dad who did the Uniform Gift to Minors Act account. We were trusted with the money that was invested for us and I'm really grateful because in some ways it became the seed capital for The Motley Fool. I'm deeply grateful for that.
I will say I did buy a sports car. Sports cars were cheaper back then. Sports cars were much cheaper, and also -- a humble brag, here -- I had a full scholarship to college, so my dad was happy and was probably OK with me spending some of that on a car.
Before we move into the middle years where we're talking to kids who can understand and respond back, and what we should say and how we should train them, you do want to think about playing it forward. What's the right cultural answer? Not for our culture but for your culture. Your family. For our family, we raised them in an environment of trust, which may sound very wholesome. It hurts a lot sometimes. It's not always right for everybody. It was right for me as a kid and then it's what I did for our kids.
I also had them with the UGMA account, which we could add to. It could be stocks and all the way through, but the wills and estates guy that we consulted with 10 years ago was saying things like, "I'd never do that. I don't trust my kids." Indeed, he was probably right. We all have a different culture that we come from, and some overlap, so there's a philosophical question. Before we proceed forward into kids who are eight, or 10, 12, does anybody want to add anything along those lines? Have we really tied a bow on starting newborns? I hope we have for our listeners, but anything more to add before we advance?
Barnes: Just a note. It doesn't have to be a parent that starts a 529 account. I started one for my brother because I wanted to make sure that when he went to college if he needed a new laptop or some books that he would be able to have that.
Gardner: That is awesome!
Brokamp: That is very thoughtful.
Gardner: Naima, I needed you as my sister. I love my sister, but that's really loving.
Barnes: Now, don't get me wrong. I have two other sisters, so they probably will hear this and will not be too happy.
Gardner: Just don't tell them that you were on this Rule Breaker Investing podcast. Just don't tell them.
Barnes: They also did get scholarships, though.
Gardner: That's pretty great. Good for them. So we've talked about types of accounts. We've talked about it being as simple as, in Mr. Trapp's case, the man who triggered this podcast, he's got Schwab so he could just start talking with his Schwab representative and surely that will work.
But maybe a question to the group, here, about amounts. Can you add on a regular basis? How much should you start it with? Any thoughts from the panel about that?
Moser: I'll go back to the word that I used from the very start, and that's the "goal." We were not trying to accomplish, in setting up these 529s, being able to pay for everything. My wife and I would like our kids to have some skin in the game and figure out a way to get grants, or scholarships, or work during school.
Moser: We wanted them to have a little ownership. The goal wasn't really to fund their entire education. With that in mind, $500 seemed like a reasonable number to get the account opened. I don't know why. I just picked it arbitrarily. And then from there, I think you can set that monthly deposit to whatever you're comfortable with, whether it's $10 or $100. I think the key is to just get it going immediately. That compound annual growth is just the most phenomenal thing, and the longer you have a chance to let it work for you, the better off you're going to be.
Daniel Messeca: I'm Daniel. I'm a financial planner with Motley Fool Wealth Management. We have a newborn. She's 6 months old...
Messeca: We also started with a 529 and figured that was the best way to go considering our goals. We front-loaded it a little bit, because we're in a position to do that now and don't know what the future holds for us. To take advantage of that compounding we figured we'd put as much as we could in today knowing that we may have conflicting goals in the future. We'd know that we took care of that to start with.
Gardner: I'm glad you just jumped in, Daniel. For our listeners, this is our full panel, now. Just to make sure it's clear I have Naima Barnes, Daniel Messeca, Robert Brokamp, and Jason Moser joining with me, so we have five voices that you're hearing from five different perspectives. Daniel, congratulations! Did you get a little paternity leave from The Motley Fool?
Messeca: I got plenty of paternity leave.
Gardner: I'm glad to hear that.
Messeca: More than I wanted!
Gardner: That's a really important thing that we figured out a few years ago at The Motley Fool. We weren't doing that 25 years ago, but we've definitely been doing that for some years. Robert, you and I are old hands, here, at The Motley Fool.
Brokamp: I know.
Gardner: Do you remember your paternity leave?
Brokamp: I did not get paternity leave.
Gardner: I didn't either.
Brokamp: But we have such a flexible workplace that it worked out OK.
Gardner: I keep wanting to jump it forward and talk about how to talk with kids about stocks and we are going to get there, but going back to one more thought, here, which is about the goal that Jason started us off with. I do remember the Uniform Gift to Minors Act account, the custodial account I was given that my father, in this case, decided what age I would get that. That's a choice, too, and that's a little bit more about philosophy and I'll just talk briefly about how I changed it up for my kids.
I received my account at the age of 18. I'm glad that I got started that young. It was responsibility for me. It wasn't enough that I was going to be retiring, but it was enough that I didn't have to run out and get a job right after college. And I was managing that account during my college days.
It was arguably a little distracting. I was not a trader, by any stretch of the imagination, so it's not like I was highly distracted. But as I thought about what I wanted to do for my kids, I decided I wanted to make it 21 for them. I think there are different ages that we can choose for those accounts and so for me, anyway, or for the Gardner kids, when they turn 21 they get theirs. Again, more toward that goal orientation. More toward trying to make the best call for you and your family or your situation and not expecting a cookie-cutter answer from our talented panel.
So if there are three chapters in this conversation, that's the end of chapter one; chapter one getting newborns, getting Daniel's 6-month-old going on the 529 plan when kids don't even know what you're doing for them and how you get that started. And darn it, it's so busy, our lives, especially these young parents having to do all the other things that this feels like yet another. But darn it, we hope you'll prioritize that because when you think backward from the future, this is one of the most important things you can do.
It's good to send thank you notes for gifts at baby showers and these kinds of things, but I would suggest that this will stand the test of time in a more powerful way. So we hope, with this podcast, you'll start to prioritize that if you weren't already before.