(Editor’s Note: George Chamberlin is on vacation. This is a repeat of an earlier column.)
Dear George: My husband and I want to open an investment account for our 9-year-old nephew. What’s the best way to do this and do we have to tell the child’s parents about the account?
, Liz, Del Mar
Dear Liz: Investing for a small child is a wonderful thing that can prove to be very profitable when it comes time to pay for college or deal with any other financial consideration. However, it is not a simple process and there are many things to take into consideration.
You may want to open a Uniformed Gifts to Minors Account. The money in the account belongs to the child but an adult must control the account.
Many people believe that the custodian has to be a parent but, in reality, any adult can serve in that position. The tax identification number for the account must be the child’s Social Security number.
There are some tax advantages for using an UGMA. A portion of the earnings are tax-free, another portion is taxed at the child’s rate and the remainder is taxed at the parents rate, regardless of who serves as custodian. You may want to talk with a tax expert on the advantages and disadvantages of using a UGMA.
Do you need to tell your nephew’s parents about the account? Not really.
If you serve as the custodian of the account it is your prerogative to inform the parents about the money and how it is invested. Of course, once paying income or capital gains taxes becomes a consideration you will have to let them know.
I’m guessing that you want to keep this a secret because you are worried that the parents might try to get their hands on the funds and use them in a manner you feel is inappropriate.
The UGMA will give you control of the funds until the child reaches the age of majority. In most states that age is 18. However, here in California, you can designate that the custodian remains in control of the funds until the child reaches the age of 21.
In general, it is a good idea to tell the parents about this money. Hopefully, they will appreciate what you are doing and support your efforts. But, if there are difficult circumstances, go ahead and get started now with the intent to share your efforts with them later.
Dear George: I have about $10,000 invested in seven different Fidelity mutual funds. Should I consolidate some of the money or leave it alone? I am 35 years old and want to be aggressive with my investments.
, Tim, San Marcos
Dear Tim: I think Fidelity has about 150 different funds, so it is difficult to know if your current investments are conservative or aggressive. However, the fact that you have seven different funds is not a problem.
I don’t think you have to consolidate as long as you are comfortable with the funds and pleased with their performance.
The best advice I could give to someone who is probably 20 years or more away from retirement is to make sure you have some type of systematic investment program that will allow you to invest on a regular basis.
Most mutual fund families have a program that allows you to have money automatically taken out of your savings or checking account and invested in the funds of your choice. You may not be able to afford monthly investments in all of the seven funds you own, so select four or five that you believe have the best long-term potential and start investing regularly.
Of course, I hope you are using all of the tax-sheltered accounts that are available to you. Does your employer offer a 401(k) plan? Have you opened a Roth IRA? These are all steps that should be taken in conjunction with your personal investment program.
Chamberlin is the host of “Money in the Morning,” heard weekdays from 9 a.m. to noon on Ksdo.com AM 1130. Send your letters to P.O. Box 1969, Carlsbad, CA 92018, or E-mail him at (email@example.com).