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Every Child Can Become a Millionaire

{ 40 comments }

millionaire Bill Ackman, chairman of Pershing Square Capital Management, has a great idea. He wants every child to become a millionaire by the time they retire. This idea is simple. The government invests $6,750 in an index fund for every child when they’re born. After 65 years, the investment would turn into a million dollars through the magic of compound interest (assuming 8%). That’s a pretty good idea, right? However, we all know this program would never get off the ground. There are too many other things to deal with. Also, it smells like socialism. Americans would never stand for that. We’re all about rugged individualism, good idea be damned. However, we don’t have to wait for the government to do this. Why not fund this program yourself?

Unfortunately, I didn’t think of this when our son was born. He’s 9 years old now so it’s a bit too late. If I invest $6,750 for him, it’ll turn into about $500,000 when he turns 65. That isn’t bad, but it isn’t a cool million. But it isn’t too late for soon to be parents out there. My brother just had a baby so this idea can help our nephew become a millionaire by retirement age.

How to invest for a baby

The easiest way to invest for a baby is to open a UTMA account. This is a custodial account and you control it until the child becomes an adult. This account is widely available. All the investment firms offer it. I learned about the UTMA account when our son’s piggy bank became too unwieldy. He saved up birthday gifts and accumulated over $200. Unfortunately, he began giving some money to his friends at school. (Run 5 laps and I’ll give you 2 dollars…) That’s very generous of him, but I don’t think it’s appropriate behavior. Surprisingly, he rarely spends money on toys. I guess our frugal habit rubbed off on him. Anyway, I figured it’s better to put the money in a bank account so the cash wasn’t tempting him. Then I found out banks don’t really offer kid savings accounts anymore. That led me to the UTMA account which is better than a savings account in every way.

Pros of UTMA

  • It’s easy to open and fund. Check it out at your brokerage.
  • No cap on contribution. But transferring over $15,000 per year will incur the federal gift tax. ($30,000 for a married couple.)
  • You can invest the money. Most saving accounts pay less than 1% interest these days. It’s way better to invest in the stock market.
  • This will teach kids about investing. My son and I check his UTMA account every month. He can see it shrink and grow. I’ve been trying to teach him how an index fund works, but he doesn’t quite get it yet. We’ll keep working on it. At least he knows investing is better than hoarding cash in the piggy bank.
  • The investment is taxed at the child’s tax rate.
  • The money in this account can be used on anything. It’s not limited to education like the 529 account.

Cons of UTMA

  • The child gains control at 21 or 18 years old, depending on the state. At that point, our son can do anything he wants with his account. I’ll encourage him to not touch it and set it aside for retirement. However, it might not last until he’s 65. Having extra money is too tempting for most young adults.
  • The UTMA account counts as student assets for FAFSA, the federal student financial aid. Students are expected to contribute 20% of their assets to their education. The parent’s assets are assessed at 5.64%. The $6,750 should grow to about $27,000 by the time the kid goes to college. This will reduce their financial aid by $5,400. (20% of $27,000.) Ouch! You can transfer it to the 529 account later.

Our son’s UTMA

UTMA

When our son was born we focused on putting money into his 529 account. Now, we have nearly $100,000 earmarked for college. Unfortunately, I didn’t know about the UTMA account and didn’t help him invest for retirement when he was a baby. We opened it when he was 6 and used the account as his first investment account. Also, it’s a good place to deposit his side hustle earnings. He helps me charge LIME scooters and gets 50%. He’ll have to make his first million the old fashion way – work. He still has a long way to go.

What do you think? Is it a good idea to help your kids become a millionaire?

Article about Bill Ackman’s idea on Marketwatch.

Image credit Viacheslav Bublyk

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

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{ 40 comments… add one }
  • [email protected] October 9, 2020, 9:42 am

    If the primary purpose is teaching kids good money habits, I wonder if doubling down on this approach could be smart.

    For example, what if you created a very simple budget for each child in your household, funded the budget with money in their own investment/savings account (even if it’s “virtual”), and then slowly taught them about budgeting and expenses through it.

    Here’s the cost of living expenses, toy expenses, activities, etc. for you that comes out of your budget, son/daughter. Here’s the extra money leftover we’re investing for your future (which may go into the UTMA/529). Seems like it might be a good nudge to get them more involved if they are incentivized to understand their own spending (costs) better and that they might “get” something out of it down the road.

    Then again, might be too much for kids!

    Jenni and I have been looking at ways to help with our nephews and nieces, UTMAs might be smart.

  • DivHut October 1, 2020, 9:53 am

    A sound idea. Too bad most won’t heed this advice. Bottom line, everyone can set money aside for their children for the long haul. It doesn’t have to be $6k it can be $60. Something, anything that can grow for decades and have compounding dividends to create a little nest egg. These days there is zero excuse to not invest for ones future especially with many zero commish brokerages and the ability to buy fractional shares too. Everyone reading this can put $10, $20 a month aside for investment purposes.

  • Harry September 29, 2020, 7:31 pm

    Great article.What will be Canadian equivalent of this account?

    • retirebyforty September 30, 2020, 8:37 am

      I asked my PF friends and I don’t think there is an equivalent account. You might need to call your stock broker and see.

  • Financial Fred September 29, 2020, 6:18 pm

    Who doesn’t love the wonders of compound interest? As Albert Einstein is reputed to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

    We have not set up a retirement plan for our kids but it sure is tempting when you see stories like this. We are saving for college and would always be there if they needed. However, I want to try to make sure they have the drive to succeed. That is the one part that makes me a little skeptical of doing something like this. Therefore, I have to ask if you knew you were going to be a millionaire would you still have the same drive to succeed as you did?

    • retirebyforty September 30, 2020, 8:20 am

      I don’t think it would make much difference. It depends on the person. Lots of kids with wealthy parents still have a lot of drive. For example, Bill Gates.
      Also, retirement is so far off for young adults. I suspect most wouldn’t care about the money they would receive in 40 years.

  • Katie Camel September 29, 2020, 5:28 am

    I knew this process was easy, but I didn’t realize how small the actual sum to be invested is. It seems investing that amount would solve our social security issues, but it could also create others. Either way, it’s a possibility worth discussing.

    I’m fortunate my parents created a UGTM for my college fund. What was left after school became mine. Knowing it existed was actually my first minor introduction to investing, though it took my high school algebra teacher explaining how it worked for me to understand. Once I learned, I started investing and haven’t stopped. Yes, I had a UGTM account, but my own contributions far outweigh what my parents created. Great job in doing the same for your son!

    • retirebyforty September 29, 2020, 8:43 am

      That’s great! This is exactly why I opened the account for our son. Kids need to learn about investing. They’ll be behind if they don’t.

  • Mr HD September 28, 2020, 7:44 pm

    I think helping kids get ahead is a fantastic idea. I wish my pate TD had taught me about investing early.

    But what are your thoughts on a Roth IRA for your child? I’m at the point where I’m ready to get an account for my 6 year old. I’ve been going back and forth with Roth and UTMA…the tax free Roth is super tempting, but I see the ease of a UTMA account.

    • retirebyforty September 29, 2020, 8:03 am

      We also have a Roth IRA for our son. He makes a little money when I use his photograph and help make videos.
      The problem with Roth is you can only contribute earned income. Also, it’s harder to withdraw.

  • SP September 28, 2020, 4:55 pm

    I think this is a reasonable option, after you maxed all possible retirement savings options for yourself, including backdoor options.

    Otherwise, there is no reason not to just give money/investments to them as their inheritance, but let it grow under your name until then.

    • retirebyforty September 29, 2020, 8:41 am

      The main reason to open a UTMA account is to teach kids about money and investment, IMO.
      It’s very motivating to see your investment grows.

  • Big-D September 28, 2020, 3:57 pm

    I have some serious considerations on this and am a big fan for various reason. My parents setup an account for each of my siblings (and me, age 5) I knew about the account growing up as my parents did taxes and me having to sign them at 10. This was my college fund. When I went to college the money was told to me it was mine, but what I had left over, I could put as a down payment on a house or a car, etc. I graduated from 7 years of college (MS, BS, AS degrees) with $40k still in the accounts (I got scholarships and etc.) and still have the funds my parents put the money in from 1980 (sold a little over time, but I have one hell of a Capital Gains when I sell that puppy). That mutual fund is worth about $200k now.

    I did the same for my son. I had no way of knowing he was going to college. Hell the way he was going it was never going to happen when I got my first bonus (he was 7), that I put 100% in to an UGMA/UTMA account for him. I put a few more bonuses over the years and he had about $60k when he went to school earlier this decade. One of the benefits of the UGMA/UTMA account (at least for him) was that since his mother and I were never married (I had primary custody), and all the money I was giving him for college was in his name, his FAFSA was filled out that I was contributing $0 for his college (which I wasn’t as I gave it all to him already). His mother was a SAHM, so earned nothing as well. So according to the Govt. he was getting $0 from his parents for college, so he basically got a free ride. This was all above board, and many financial aid and Govt. employees reviewed and said we filled the forms out correctly (they didn’t ask the right questions, so we answered the questions they asked). At the end of school he had about $20k left over.

    I also have UGMA/UTMA accounts for each of my nieces and nephews. I bought savings bonds for them for their first few birthdays then realized they were not doing squat so converted them all to UGMA/UTMA accounts after cashing them all in. I put $1000 in each account (basically $50 a year for presents for Christmas/birthday, for 18 years). They should have about $2500-$3000 based on age when they graduate high school based on current estimates. So essentially they forego yearly birthday/Christmas presents but get a lump sum when they turn age of majority. My nieces each have a share of Disney (hey they all like princesses) as well as a SP 500 Spider. Nephews have a share of Apple and the rest in SP 500 Spider.

    I mean – is it the most tax efficient – but it is nice in a lot of ways if you are willing to do a lot of things. My siblings can add more to the accounts if they want but right now they are just asking me to keep them separate from what they have. Since my nieces and nephews don’t have jobs (only one legally can at this point) taxes really have not been an issue.

    • retirebyforty September 29, 2020, 8:39 am

      Wow, that’s great! I hope this helps someone who is in a similar position. It’s a great way to get around EFC.
      Although, I thought they would expect him to contribute 20% of his account value. That still shouldn’t be really high.
      I think our net worth and assets are too high for our son to get much from financial aid. We’ll have to see what happens when he’s ready for college.
      (FAFSA should count parent’s assets and income as well. It doesn’t matter how much you contribute.)

      • Big-D September 30, 2020, 12:35 am

        The other piece is that I was never married, and had a custody agreement. This made it so there were two separate families involved. Why my family (me) and her family would contribute. If you read the questions – they are poorly worded and most people assume they mean “tell me how much you make”. It was a fluke and worked out.

    • jim September 29, 2020, 10:13 am

      You lost me at : ” his FAFSA was filled out that I was contributing $0 for his college ”
      FAFSA isn’t asking how much you contribute. Its asking “how much ya got” and then it TELLS you how much you ought to contribute.
      You’ve got custody and 200k in the bank. Not sure how you’re not expected to contribute.

      • Big-D September 30, 2020, 12:33 am

        I agree – and I thought it was that way as well. The questions were not “how much does dad make, how much does mother make” they were along the lines of “how much does your father plan to contribute to your college?” Which the answer of the question was the $40k I contributed to his UGMA/UTMA. His mother was legally required to contribute the other $40k (which she couldn’t). I know it is silly as hell and I was shocked it didn’t ask how much I made, but the questions were stupidly asked in such a way that I didn’t have to give my salary or anything. It was a fluke – as I was surely expecting to have to answer those questions and for him to get nothing since I made near $100k.

  • nicoleandmaggie September 28, 2020, 9:46 am

    I think I’d rather put that money in a 529 instead… not that I don’t trust my kids when they hit 21, but I suspect such money will be more likely to go a wedding or a down payment for a house they can’t really afford than to retirement. It’s hard to predict what people will do, but…

    • retirebyforty September 29, 2020, 8:33 am

      I suspect you’re right about wedding/down payment.
      We’ll have to figure out how to move the UTMA money into his Roth IRA.

  • Michelle September 28, 2020, 9:37 am

    I have a few relatives who opened 529 accounts for their kids and it worked out very well for them. My parents didn’t know about this option when my sister and I were born so they saved up for our college education the traditional way (savings accounts and investing). My sister just had her first baby and isn’t sure how to set her child up financially. Do you have any posts about UTMA v. 529 and other types of accounts (traditional brokerage, a trust)? Would love to see what her options are and to get more educated on this. Thank you!

    • retirebyforty September 28, 2020, 10:59 am

      I don’t have a post that compares all the options. Here is one about the 529 account. It has a bit about UTMA as well.
      https://retireby40.org/529-saving-plans-college/
      I think it really depends on what the money is for.
      College – 529 is best option.
      General investing – UTMA.
      More control – parent’s account.
      I can work on a post to compare the options, but it might take a while.

  • Jim @ Route to Retire September 28, 2020, 8:42 am

    I think the biggest fear that many parents might have is that their kids will just become spoiled brats when the money’s just given to them. But if you’re raising your kid to really understand money and working with them on it, I don’t think it’ll be a big problem.

    I started a UTMA account for my daughter and she’s the one doing most of the funding on this with any money she gets. The rule of thumb I’ve been trying to instill with her is that half of whatever she gets or earns should be saved and invested. Hopefully, that sticks with her over the years! Then we look at her account every month or two during her personal finance class I do with her so she can see it as it rises and falls.

    • retirebyforty September 29, 2020, 8:31 am

      I don’t think it’s a problem if the money is designated for a particular purpose. Education or retirement for example.
      That’s great. I’m trying to teach him to save 50% too. However, he likes to save 100% and then smooch off his parent…

  • freddy smidlap September 28, 2020, 8:25 am

    i think it’s a great idea. i bought dividend reinvestment shares in a local bank for a niece and nephew many years ago before you could easily do it in a brokerage. if you ask me even more important than the absolute growth of the money is the example of regular investing and the lessons from that he can take into adulthood. plus you have a roth for him too, right?

    • retirebyforty September 29, 2020, 8:29 am

      Yes, we have a Roth IRA for him as well. That’s a better account if the child can earn the money somehow.

  • Backpack Finance September 28, 2020, 7:36 am

    I think it’s a great idea putting enough money for your child so he doesn’t have to endure hardship when starting his life. For example, my parents saved up enough money for my college tuition. It becomes less important that this money can be a million dollars at the age of 65. Your child should be able to generate that on his own 🙂

    • retirebyforty September 28, 2020, 8:05 am

      That’s great. My parent helped me with my college education too. It was great to not have a student loan hanging over me when I started working.

  • Xrayvsn September 28, 2020, 4:26 am

    I’ve been maxing the 15k contribution into a 529 account so I think that alone precludes me from funding a UTMA unless I want to use up some of the lifetime exemption on gift tax.

    It does sound like it would be better to keep it in the parents account to avoid the bigger financial aid penalty unless the parents assets make it a moot point either way

    • retirebyforty September 28, 2020, 8:03 am

      The 529 account is better if this money is earmarked for education.

  • Lazy Man and Money September 28, 2020, 1:59 am

    I haven’t gotten a UTMA account, but maybe I should look into it. My bank, USAA, does have a kid’s saving account. I periodically sweep the money into a Robinhood account that didn’t have any kind of kid controls.

    I guess it will be taxed at my rate, but it will be long-term capital gains. I feel better that it seems more efficient for the FAFSA calculation. Also, it’s better to invest than not to at all.

    I have to look at Ackman’s plan. In 2015, I wrote about the “Financially Independent Baby”, which sounds exactly like this concept – https://www.lazymanandmoney.com/the-financially-independent-baby/.

    • retirebyforty September 28, 2020, 7:56 am

      The Robinhood account is a good idea. I might do that at some point if FAFSA becomes a problem.
      Thanks for the mention.

  • Dave @ Accidental FIRE September 28, 2020, 12:50 am

    If I ever have kids I’ll put a good chunk of cash in an account for them that will be untouchable. When they get old enough I’ll show them what’s it’s made – and still keep it untouchable. Then they’ll see the power of compounding and the market, and hopefully follow suit with their own savings

  • Mr. Tako September 28, 2020, 12:07 am

    Definitely teaching to save and invest at an early age is a good idea.

    Based on how the FAFSA assesses assets on the UTMA account, wouldn’t it make more sense for the parent to simply hold the assets in a brokerage account? Wouldn’t that maximize the prospects for financial aid?

    Curious to hear your thoughts on this Joe!

    • retirebyforty September 28, 2020, 7:52 am

      For us, I don’t think we’ll get much financial aid anyway. The parent’s EFC (net worth – retirement accounts – primary residence) is already very high for us. If it becomes an issue, we can just move the UTMA money into my account.

      • TPM September 28, 2020, 2:20 pm

        I love this post. Don’t we all wish someone did this for us. We did something similar. We invested through UTMA directly in Disney stock until the balance hit $5,000 for our kids in addition to funding 529 accounts. I’ve been procrastinating picking a second company to invest for them, maybe I will do it soon. The goal is to share how much I contributed vs capital appreciation vs dividend reinvestment all within business they can understand. Maybe it will click and they will love investing. Or maybe they will be able to use the money to study abroad one summer, something I wish I had money for.

        • retirebyforty September 29, 2020, 8:35 am

          That’s great! Disney has done really well over the last few years.
          We’ve only put it in an index fund. I’ll encourage him to study abroad too. Maybe there is an exchange program in high school.

      • Ginger October 11, 2020, 10:44 am

        You cannot just transfer the money to your account. Legally the money must be used for the minor’s benefit. And it cannot be costs normally paid by parents like food, shelter and clothing. You can transfer it to a custodial 529 however but that does come with additional rules that a parental 529 does not.

        • retirebyforty October 11, 2020, 4:50 pm

          You’re right. I updated the post. Transferring it to a custodial 529 would be the way to go.

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