They say it’s never too early to start investing. Brennan Schlagbaum, CPA, took this to heart. He opened an investment account for his two-year-old daughter, Logan, before she was even born.
Schlagbaum — better known as “BudgetDog” to his hundreds of thousands of followers on Instagram and X (formerly Twitter) — posted a thread on his Instagram in March about how he’s growing his daughter’s fortune while she’s still in diapers.
Schlagbaum and his wife, Erin, opened three different accounts for Logan: a 529 plan, a taxable brokerage account and a custodial Roth IRA.
“With these contributions alone, [Logan will] reached a whopping $3,184,873 from [age] 50,” Schlagbaum wrote in his post. “That assumes an 8 percent return. If he waits until 65 – $10,102,958.
Schlagbaum, 31, says he first heard about investing in babies when he was 25 and working as an auditor at a business consulting company.
“Once I started learning about it, I realized it was such an obvious decision,” says Schlagbaum, who now lives with his family in Arlington, Texas. “When we had a child at 30, I said to my wife, ‘We’re definitely going to do this.’
Now the Schlagbaums are following the same investment strategy for their newborn daughter Ellie.
“These kids are going to be so far ahead,” says Schlagbaum.
Working with a financial advisor can help you navigate the nuances of investing for your baby, from choosing college savings plans to setting up a Roth IRA.
Here’s how the couple is setting their daughters up for financial success—and how you can do the same for your kids.
Contribute $250 per month to a 529 plan
The Schlagbaums contribute $250 a month to a 529 plan, a tax-advantaged account used to help pay for educational expenses. Parents (or any other adult) can open the account and fund it on behalf of the child.
Contributions to the account grow tax-deferred, meaning you don’t pay taxes on the money up front. The money can be withdrawn tax-free as long as it is used for qualified education expenses, covering a wide range of college expenses such as tuition, books and even a computer, to K-12 private school tuition.
And thanks to the SECURE Act 2.0, any unused money in a 529 plan that’s been open for at least 15 years can be rolled over into a Roth IRA for the beneficiary. This provision, which begins in 2024, allows a lifetime transfer of up to $35,000 in value.
“There’s a huge benefit to it,” says Schlagbaum. “If you are paying more for school, you don’t have to worry anymore. You still have an alternative to turn to.”
Navigating the ever-changing tax rules isn’t easy, so working with an expert can be beneficial. A financial advisor can help you compare 529 plans in your state and guide you through investment options.
Deposit $250 per month into your own brokerage account
The Schlagbaums also put $250 a month into a taxable brokerage account. They opened accounts for Logan and Ellie before they were even born.
These are not custodial accounts: they are set up under the parents’ names, not Logan’s or Ellie’s. They invest in low-cost index funds and exchange-traded funds, or ETFs.
“We will give it to [them] at a later date,” says Schlagbaum. “But we have to choose when and how much. We retain control. This is our investment.”
He points to the gift tax code, which in 2023 allows one person to gift another person up to $17,000 a year — with no tax consequences to either party.
The Schlagbaums would be subject to capital gains tax if they sold investments in the brokerage account before transferring funds to their daughters.
This may be a good strategy, but consider consulting a financial advisor first. A professional can help you navigate the tax implications of donating assets as well as selling brokerage account investments when the time comes.
Schlagbaum suggests setting up taxable brokerage accounts for each child, separate from your own, to avoid confusion.
“We know the purpose of this account is only for [them],” he says. “So whatever that balance is, it’s technical [their] balance.”
Why didn’t they choose UTMA or UGMA account
There is a different type of investment account that parents can open for their children – a custodial brokerage account, also known as a UTMA or UGMA account. But Brennan says they weren’t his first choice.
With these accounts, investment assets are managed for the child until he or she reaches adulthood — between 18 and 21, depending on the state. The parent loses control of the account once the child becomes an adult.
And unlike a 529 plan, funds from a UTMA or UGMA can be used to any kind purpose, meaning they are not intended exclusively for education.
Because they are held in the child’s name, UTMA/UGMA accounts can hurt financial aid eligibility more than 529 plans or assets owned by parents.
“There’s a 20 percent impact on financial aid with this type of bill,” he says. “Let’s say your kid has $20,000 in there. This will reduce their need for financial aid by $4,000. Compare that to a 529, which is a 5.64 percent reduction.
Pay your baby to work
Some teenagers have jobs. But do you know any little kids who get 1099s?
Schlagbaum’s last tip may sound far-fetched, but it’s perfectly legal thanks to an account called a custodial Roth IRA.
An adult (usually a parent) can set up a custodial Roth IRA on behalf of a minor, and the minor becomes the sole owner of the account once they reach legal age. These accounts also offer the child flexibility for tax-free withdrawals later in life.
To qualify for a custodial Roth IRA, your child must be earning a salary from a job — and paying taxes on that income — whether it’s a babysitting gig or working at a grocery store.
To work for Logan — who apparently wasn’t hired as a newborn — Schlagbaum enlisted her through her company. He pays her $50 an hour to model babies.
Using a custodial Roth IRA, Schlagbaum can target the 2024 statutory IRA contribution limit of $7,000 per year for each working child. They’re not earning the full amount of contributions now, but Brennan says the goal is to increase his daughters’ wages after they turn seven.
“They’re putting it directly into a tax-free vehicle and over time they’ll have a lot of growth,” he says.
For anything to be legitimate (and legal), the work the child is doing must be ordinary and necessary for the business. “You can’t just pay your child to do anything above market value or it could get noticed [by the IRS],” says Schlagbaum.
To do so, the Schlagbaums had to set up separate checking accounts for their daughters. They also created a trust, a complex legal structure used to transfer assets.
“Trust makes sense once you add dependents and complexity to your situation,” says Schlagbaum. “There will be conditions that we have in relation to the trust.”
Any dependent who earns less than $13,850 in 2023 is not required to pay federal income taxes. But your child will be subject to self-employment taxes if you assign him 1099 tax status as an employee.
“If it’s a side hustle, the kid will just have a Schedule C and be an independent contractor on a 1099,” he says.
Schlagbaum also created a tracking tool to note each time his children were paid by the company, the amount and for what type of work.
“I also have an audit trail,” he added.
Schlagbaum acknowledges that the average person should consult a financial advisor or CPA to set up this type of Roth IRA custodial arrangement.
“Just to be safe,” he says. “You’ll never know your way through these things.”
Why invest for your children?
It’s no secret that wealth accumulates over time. More time in the market means more time for investment profits to accumulate and grow.
“With more than 20 years of compounding interest, it doesn’t take much to become extremely wealthy,” says Schlagbaum.
Need expert guidance when it comes to managing your investments or planning for retirement?
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The Schlagbaums invest $500 a month for each daughter — not including money added to their Roth IRAs for baby modeling. That’s a lot of money for the average person.
But Schlagbaum insists his approach isn’t just for the rich.
“The amount doesn’t really matter,” he says. “You can start small.”
By contributing just $50 per month to a 529 plan and $50 per month to a brokerage account, you can accumulate over $73,000 for your child over 23 years before taxes and inflation, assuming an 8 percent annual return compounded annually.
It’s not millions of dollars, of course, but it could help pay for their college, a down payment on a home, or give them a head start on their retirement savings.
“The thing to remember is to do it as early and as often as possible,” says Brennan. “It’s about building a habit.”
Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making an investment decision. In addition, investors are advised that past performance of an investment product is no guarantee of future appreciation.