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We were thinking bonds, by the way, because we think giving him bonds every birthday and holiday would help him learn about money, without much risk. Are bonds a good instructional tool for kids? (We're sorta using my nephew as a guinea pig to test this stuff out on before we have our own kids. heh)
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I don't like the idea of bonds. US savings bonds give you about 4%, so it doesn't grow very fast. Plus, in the old days, the actual bonds sometimes get lost, and it is a real pain trying to remember about them or get them replaced. (I think now it's done online at
www.treasurydirect.gov so it's probably better.)
Back around 1997, I thought I would try using individual stocks using DRIP plans. I had some of my own, and gave shares to my brothers and sisters for Christmas presents. This also turned out to be a real pain, as the owner has to keep track of the cost basis, by basically keeping every quarterly statement forever... If they lose statements they end up paying more tax when it's sold. Plus it's not diversified having just 1 or 2 stocks.
So I guess the 2 best choices are mutual funds held directly with the mutual fund company, or a brokerage account at a place with access to no-transaction fee mutual funds. The registration would probably be a custodial account: Elaine Monster custodian for Nephew Monster. It uses his SSN, and he needs to get the tax forms each year. But as custodian, only you can ask the brokerage to issue a check, and only to pay for something for him, like college. At 21 or 18 (varies by state) the money is legally his.
-Tom