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Setting your children up for success early in life can be as simple as opening a special savings account for them. With careful planning, by the time your kids turn 18, they could have a substantial fund to cover college tuition, purchase their first car, or even kickstart a small business. Read on to discover the best saving strategies tailored to your situation and where to start.
Key Takeaways
The best options to save for a child include opening a dedicated savings account, investing in a 529 college savings plan, or setting up a custodial account.
A savings account provides simplicity and accessibility, while a 529 plan offers tax advantages for educational expenses. Custodial accounts allow minors to own securities with a custodian's guidance.
Additionally, a Roth IRA can be beneficial if your child has earned income, providing tax-free withdrawals in retirement. High-yield savings accounts and automatic transfers can also be effective tools.
Lastly, educational savings bonds can be a reliable choice for educational purposes. Consulting a financial advisor can help tailor a savings plan that suits your objectives and preferences.
If the benefits were not obvious, here are some things to consider about saving for your kids:
There are many ways to save for your kids, but investing in a 529 college savings plan is the fastest and most widely used option. Here are some steps to take before you decide on a given route:
Sit down with your partner or anyone else who is involved in your finances and child’s life and decide on what goals you would want to achieve with the help of your kid’s financial plan.
Here are a few questions that you would most likely have to talk over:
Some banks would require children to reach a certain age before they would be allowed to have a savings account opened for them. However, there are financial institutions without any age restrictions.
In any case, before opening an account, you would have to pay attention to:
Some banks would allow you to open such an account online by simply uploading the child’s birth certificate, social security card, passport, or driver’s license.
Do bear in mind that the parent might be required to have an existing account before opening a separate one for the kid.
Ideally, you would want to decide on a certain amount and have it automatically transferred to your child’s savings account every time you receive your paycheck. In such a way, you won’t forget to make the necessary payment, and the overall amount will be growing without you even actively thinking about it.
If you’re not going to use the savings account for a specific expense (like buying a car), it will be transferred over to your kid once he or she reaches 18 years of age.
Most banks would automatically convert a child’s savings account into a traditional savings account once the individual turns 18. Usually, the account owner would have to choose to either continue saving or close the account and withdraw all the funds.
Make sure to talk this through with your kid beforehand.
We have focused on a few options like 529 plans and trusts, but here are even more ways to save money for your kids:
Most banks would allow you to co-own a savings account with your child.
By regularly transferring money to the savings account, you’ll not only make sure that your kid has a small fortune accumulated by the time he reaches 18, but you’ll also help the child develop the habit of saving.
Such accounts can typically be moved into teen checking accounts, once the youngster finds a job, but you would remain the co-owner of the account until the kid is no longer a minor.
A 529 plan is one of the most effective ways to encourage saving for future education costs.
You can opt for either a general college savings or a prepaid tuition plan. The main benefit of the latter is that it locks in the current rates for various public institutions. But a general college savings plan offers a lot more flexibility.
In any case, you would have to make sure that you are familiar with all the limitations that such a plan implies as withdrawing money from the plan for non-qualified purchases might lead to penalties.
Though a Roth IRA is an individual retirement account, with the right planning, you might be able to use it to cover your child’s expenses.
Here are the main things that you would have to bear in mind:
A health savings account allows you to save money to pay for qualified medical expenses. The money is tax-deductible and grows tax-free. Furthermore, it can be withdrawn tax-free to help pay for certain medical expenses not only for you but also for your child.
Bear in mind that you can contribute only if you have an HSA-eligible plan.
ABLE accounts are tax-advantaged savings accounts for disabled individuals and their families.
An annual total of $17,000 can be contributed to the account. One important thing is that such accounts do not count against any form of government assistance which is a huge plus.
While a children’s savings account is typically a joint bank account, a custodial account is an investment account that an adult can set up for a minor (all the funds contributed belong to the child and are irrevocable).
There are two types of custodial accounts:
Unlike a will that can be challenged by third parties, a trust fund will help make sure that your money reaches your child.
You can set the trust up to be dispersed in one lump sum or according to a payment schedule, and you can even determine what the specific purpose of the money distribution would be.
Do bear in mind that a trust fund will gain interest only if it holds assets that produce income.
You can open a certificate of deposit on behalf of your child using a custodial account.
CDs are low-risk investments which means that they can be used to teach the kid about the importance of investing and saving.
The earnings from a CD will be taxed as income, and it might not be the best way to save money for your child’s college education, but it’s a great educational tool.
A custodial account would allow a minor to own assets in a brokerage account as well. However, the custodian will make all the investment decisions related to the account until the minor claims full control of the account once he or she reaches 18.
Such an account is another great tool that will help introduce your kid to investing at an early age.
See the graphic below, it may be wise to put some money aside to mitigate some of the rising costs of raising children.
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