Acorns Early offers an easy way to invest in your child’s future. A UTMA / UGMA account allows proactive parents and guardians to create a savings account to cover their child’s future expenses such as tuition and textbooks.
Acorns Early is different from traditional 529 college savings plans because a child can use those funds for anything, not just education.
In this article, we’ll break down the pros and cons of opening acorns early for your child so you can make an informed decision about your child’s long-term financial future. Here is the Early Acorns Inner Spoon.
What type of account is Acorns Early?
Acorns Early contains the Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts. Accounts exist in most states to help families safeguard the future of their children. The exceptions are Vermont and South Carolina, which do not allow UTMA accounts.
Think of UTMA and UGMA as the forerunners of the 529 College Savings Account. The name of this plan derives from Section 529 of the Internal Revenue Code, passed in 1996, which permits the tax-free status of “conditional study programs.”
Connected: The Complete Guide to the Best 529 Plans by State
These accounts give a parent or guardian control over funds until the child is 18 or, in some states, 21 years of age and can access the money.
Acorns Early allows custodians to place various securities in the portfolio. Some of the more common options include stocks, bonds, and mutual funds – the account limits high-risk investments such as buying on margin and trading options.
In practice, a UTMA / UGMA account does not offer the same financial assistance benefits as a 529 plan. When your child fills out financial assistance documents, they must list all UTMA or UGMA accounts as assets. These accounts can reduce their financial aid by 20% of the account value, while the 529 plan only cuts it by 5.64%.
Acorns Early allows Custodians to deposit up to $ 15,000 per year in after tax dollars without paying gift tax. This figure doubles to $ 30,000 if you file your tax return together. The first $ 1,100 of your child’s unearned income is tax deductible, and anything over that amount uses the child’s tax rate.
Pricing
The family plan costs $ 5 per month and offers a complete investment platform for families. You can create separate child accounts for your children instead of creating multiple separate accounts.
Acorns allows users to create as many sub accounts as they want in the family plan. You also won’t pay extra for additional users. Plus, you can manage your accounts from a single location, making it easy to set up recurring payments or receive bonus investments.
As the name suggests, the family plan is suitable for families. It requires an integrated investment approach that allows each individual to create customized portfolios under one account.
The family plan has some of Acorns’ most popular features, such as the $ 5 recurring investment and free financial literacy materials. The key one is UTMA / UGMA. Acorn Early Funds go to whatever benefits your child grows up to.
An Acorns Early Account makes it easy to save on the things you already use and love. Acorns offers bonus investments and family savings through partners such as ABC Mouse and Disney +. The plan even includes a free children’s book to spark your child’s interest in finance.
A family plan makes sense if you’re an Acorns member and want to get more accounts. Perhaps you gave birth to or adopted a child last year and want to start saving on his behalf. This option also makes sense if you prefer the UGMA plan over the 529 plan and enjoy Acorns financial literacy content.
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What’s in the early Acorns portfolio?
Acorns Early allows your child to hold a wide variety of assets in their hands. While Acorns Early is a UTMA / UGMA account, it’s worth noting the difference between the two. For example, these two offers have different investment options.
The UGMA account only allows you to invest in financial products. Think about cash, stocks, bonds, mutual funds, and any other type of securitized asset. In addition, all states accept UGMA, while only 48 states accept UTMA.
UTMAs allow custodians to invest in a wider range of assets, including private ones. For example, a parent can place their car or document in UTMA. The account can also handle various forms of real estate and property.
Specific assets will depend on your investment preferences, and Acorns gives you control over assets based on your risk tolerance and your interest. If you are looking for an aggressive plan, you can have a mix of well-known international and domestic stocks with real estate and emerging market stocks to complement your portfolio. However, if you want to play it safe, you can opt for low yield bonds.
Why should I open an early Acorns account?
Acorns Early sets children up for future financial success. You don’t even need to invest a lot of money to grow a soft nest egg. Microinvesting stands out as one of the most effective ways to amass wealth for any budget.
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Consider this example from the Acorns website. Let’s say you open an Acorns Early account on your child’s birthday.
You decide to invest $ 5 a day in Acorns Early. If the market brings in 8% of the investment, your child will be a millionaire by 50, which is also a conservative estimate.
According to Goldman Sachs, the 10-year average stock market return is 9.2%. The S&P 500 performed even better, adding 13.6% for the year. In other words: your child can become a millionaire even before their 50s, given the right market conditions.
Investing in young people also gives your child the opportunity to hedge against risks over time. While financial setbacks such as the Great Depression and the coronavirus-related recession are inevitable, long-term investing can iron out the unevenness along the way. However, if a child’s investment portfolio is too dependent on conservative assets, he will have to save more money because his account will not grow as quickly.
As New York Times author Tara Siegel Bernard notes, “Young people can usually afford more risk and invest more in stocks, which can lead to more gains over time because they have many working years ahead of them. … If the market crashes, their portfolio will have time to recover. “
Adults don’t have that luxury when investing. Saving on a down payment or car requires a less risky investment approach. Adults can open high-yielding savings accounts and mutual funds by default so they don’t lose their investments during a financial crash.
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Acorns understands that kids won’t need to access their funds for years or even decades. This long-term perspective allows children to benefit from competitive interest rates and maximize their return on investment. Even when there is a temporary downturn in the market, the long-term benefits outweigh the short-term disadvantages.
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Possible disadvantages of an early acorn
The same tax incentives that encourage some people to open an account with Acorns Early may scare others away. Beneficiaries pay a reduced tax rate on the first amount of money. The excess income then falls into the parent’s marginal tax category. This change in tax rates does not happen with 529 plans.
People with small balances can also feel the prick of commission at the expense. While Acorns doesn’t charge as much as other platforms, it can leave a noticeable dent if you’re a micro-investor. Imagine opening a family plan with a $ 100 balance. If you do nothing else, the $ 60 off this initial deposit will disappear in monthly fees.
Acorns changes its reward structure for investors when they reach $ 5,000. Instead of charging $ 1 to $ 5 per plan, you need to pay 1.2% of your account balance. However, upfront payments can seem substantial compared to how much money you set aside.
When does the account go to my child?
The rules for transferring your Acorns Early account to your child differ from state to state. In some countries, the age of majority is considered 18, in others it is 21. Once your growing child reaches the appropriate age, you can transfer an account in his name.
Some people prefer to translate with the consent of the custodian. This step allows the parents to retain some oversight of the account. The child can also remove guardians from the account at the age of termination.
What are the tax implications for early acorns?
There are no deferred tax assets in either UGMA or UTMA; The IRS taxes all capital gains whenever the custodian realizes a return on investment. Since the account is created by parents and guardians, they can also pay Capital Gains Tax on behalf of their child.
Acorns Early offers some notable tax benefits, although this depends on whether you file your child’s tax return as a dependent. For example, in most cases, the recipient will pay a lower tax rate on the income of the account. This advantage translates into significant tax savings as adults often pay taxes on higher incomes.
Acorn Early Alternatives
College Savings Plan 529
The 529 plan offers active parents the opportunity to save money for college. This allows them to make tax-deferred deductions for qualified higher education costs, including student loans, textbooks, and apprenticeship programs.
Nearly every state has a 529 plan, although the details vary from state to state. Federal tax law provides parents with unique tax breaks such as qualified tax-free allocation and five-year gift tax averaging. The 529 plan also has no income, age, or annual contribution limits.
The 529 plan requires the recipient to go to college in order to use the money at the maximum tax benefit. A child can still receive money without penalty if he earns a tax-free stipend, enters the US Army, dies, or becomes disabled. Otherwise, custodians must pay income tax on income.
Connected: Best Way to Save for College: UGMA vs 529 Plan
Coverdell ESA
Coverdell ESA functions as a trust or custodian account. As with the 529 plan, parents can only create them to pay for the cost of qualified education, including college, primary, and secondary education costs.
The beneficiary must be at least 17 years old for the parents or guardians to open an account. All contributions must be in cash and are not tax deductible. Many people prefer the Acorns Early or 529 plan because the Coverdell ESA has a maximum contribution of $ 2,000 per year.
Final thoughts
Acorns Early is an affordable and effective way to save money on your child’s future. Parents and guardians can open UTMA / UGMA in less than five minutes and transfer profits as soon as the child reaches the age of majority. Acorns Early also includes financial literacy materials and automated investment tools to ensure your investments don’t go unnoticed.
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