If the IRS is handing out money, it really must be Christmas in July. That’s right, starting July 15 parents will start to receive the first payments of the advance Child Tax Credit (CTC) as a monthly cash amount. This is the result of the American Rescue Plan Act (ARPA) of 2021. Right now, ARPA expands the CTC only for tax year 2021. The jury is still out on whether this will continue as a benefit for families. I expect, and hope, that some form of this may become permanent for families who can use the extra cash each month. The Biden administration has already signaled a willingness to extend the program for five more years. So, how much is it, who qualifies, and what should be done with that money?
For now, ARPA increases the CTC from $2,000 per year per qualifying child to $3,600 for those age 5 and under, and $3,000 for those ages 6 through 17. Starting July 15 if you have a child who is age 5 and under, you should see $300 per month. For the 6 through 17 age group, it’s $250 per month. Phaseout thresholds are very generous for this credit and start at $150,000 for those married filing jointly and $75,000 for single filers. At this point, your benefit is reduced $50 for each $1,000 of AGI above this first threshold. The next threshold is $400,000 for married filing jointly and $200,000 for single filers. At this point, the CTC further reduces $50 for each $1,000 of AGI above this threshold.
That’s basically who qualifies and how much. There are some AGI adjustments for other filing statuses. There is also the potential for the IRS to make tweaks and corrections as they rollout the program. For now, the question is what to do with this money? Obviously, if you need the money for your child’s care, spend it on your child. That’s what it is for. However, if you are in the upper reaches of those tax brackets and don’t necessarily need the money, this could give your child a huge head start on investing and saving. Let’s look at some options. None are without their own particular thorns.
Savings Account – Probably the easiest for a child to understand, but you may have some hoop jumping. Generally, those under age 18 cannot sign legal documents, i.e., account opening forms. However, there are institutions that may allow you to open a joint account. Later, once your child is of legal age, you can remove yourself as account owner. One option, is to open the account in your name and then gift it later when the child is over age 18. Depending on the balance at that time, you may have some gift tax form filing.
529 Plan – Another option is to open a 529 plan for higher education if you don’t already have one in place. If you do have one for your child, way to go! Once established, you could add the CTC money to this account. You still have control, and it doesn’t have a substantial impact on their college aid if the account is in your name and they are the beneficiary. Other advantages include the ability to change ownership later, or even beneficiary! One disadvantage, if the withdrawals are used for non-qualified educational purposes, there is ordinary tax and a 10% penalty tax on the earnings portion.
UGMA & UTMA – These days we don’t hear much about these accounts but they are still options. UGMA is the Uniform Gift to Minors Act account. UTMA is the Uniform Transfers to Minors Act account. This blog post is too limited to cover the intricacies of these two account types. Summarily, the UGMA is generally used for cash and securities, while the UTMA allows for a broader array of investment assets. Age of consent is also different, and this varies from state to state, but for UGMA your child would generally be able to assume control of the account at age 18. For UTMA, you have a little more time and control, and age of majority is usually 21, and in California, if the account is titled correctly, can be delayed until age 25. If the account has grown to substantial value, your child may not be ready to control the money at age 18, or 21, or even age 25. Hence, the nickname of “Corvette” or “Sportscar” fund. Working with these two account types as a vehicle requires a lot of financial education for your child and trust on your part.
IRA – Everyone asks, ‘can my kid have an IRA?’ Well, yes – if they have earned income. That’s the key, they do need to have their own income. If that’s the case, you can sock away up to $6,000 if they have at least that amount in earnings. If they only earned $1,000 in wages for the year, that’s the max permissible.
Why the big concern over this money? Well, consider this. I ran a quick calculation at investor.gov to see what giving a child $5,000 at birth and compounding it annually until age 60 would yield. Turns out, without touching the money, it’s a lot! At 5% you get $93,395, at 7% it grows to $289,732, and at 9% a whopping. $880,156. Now, let’s add that opening amount plus $50 per month. You get $305,546 @5%, $777,844 @7%, and $2,047,031 @9%. You see where I’m going with this… the historical market average return is around 10%. So, if you gave a newborn a $5,000 account that was invested solely in equities until age 60, made no withdrawals, no additions, and rode just the average 10% wave, that account could be worth over $1,522,408 by age 60. Early retirement and self-funding until Social Security kicks-in and your other lifetime savings and investments makes your gold years pretty darn golden!
If you are in the position to do so, look at ways of getting that CTC money to work for your child’s future – especially if they are really young. If you don’t know what to do to get started, just reach out to me. Contact me and let’s get started. As an independent Certified Financial Planner™, I can help you establish a brighter future for yourself and your children. #talktometuesday #education #Hireaplanner #financialsavvy #stressfree #savings #moneyeducation #financialeducation #CFPPro #EstatePlan #EstatePlanning #CTC #ChildTaxCredit #ARPA #IRA #savings #UGMA #UTMA #529