I bet you’re wondering what a photo of Christmas presents has to do with savings for your kids? Basically, it’s my attempt at subliminal messaging to not spend a whole bunch on Christmas this year, scale back and instead redirect those funds towards creating some wealth for your little ones.
Perhaps you can even sock away what you would normally spend on holiday travel or ask grandparents not to send you a bunch of plastic toys your kids don’t even want. and instead to contribute to these accounts. I promise you, the kids will barely remember the extra Lego set but absolutely WILL remember that they graduated with minimal student loan debt or their parents handed over a five-figure account balance once they graduated.
Without further ado, here are some ways to consider saving and investing for your kids’ futures:
A regular savings account
I really don’t recommend these for most people due to the very low interest rate most savings accounts will give you. However, it may be an appropriate option if you have an older child or think there will be a more immediate need for the funds(less than 5 years).
If you do go this route, you should look into opening a high-yield savings account instead of a savings account with a traditional bank so you can at least earn a bit more interest on your hard-earned money.
This might be for you if: you want the funds to be highly liquid with very little tax impact. You anticipate a short-term need for the funds.
We all know that education costs are some of the biggest costs you will incur as a parent (or your child in the form of debt upon graduating college). Student loans are an albatross on the neck of many millennials, but it doesn’t need to be for our children. By saving for our kids’ education in a tax-advantaged 529 account we can have the benefit of investing a small amount, allowing it to grow over time if invested appropriately and never have to pay taxes on the earnings if they’re used for qualifying education expenses. Your state may also give you a tax break when you make contributions which really makes this a win-win for you and your kids. A little bit goes a long way here, so don’t feel as if you need a whole lot of money. Even $25/month for a newborn baby can really add up!!
This might be for you: if you want to reduce taxable income, have a longer investment time-horizon, want the benefit of tax-deferred growth, feel strongly that your child will attend private school for elementary of high school education or will attend college.
A Custodial UTMA or UGMA account
These accounts are really the most flexible option for those of you who want the money you’re saving for your children to grow, but don’t want to dedicate them specifically for education-related expenses.
Essentially an UTMA or UGMA account is an investment account for children. Since they are not able to own properly directly as minors, this allows you to invest for their future even while they are young. The age your kid will be able to access the funds really depends upon your state, but they are generally 18 or 21 years old.
One of the biggest concerns I hear from parents is of handing their children large sums of money at an immature age, which I totally understand. After all, we know how unsavvy we were with finances at that age. However, I view it as an amazing opportunity to prepare them for adulthood and managing money well. Engaging in ongoing discussions with them from a young age on how to handle money are so crucial for long-term financial success and breaking generational cycles. I personally think UTMA/UGMA accounts are really a great opportunity to do so since you will be forced to make the funds available to them at the “age of majority” — whether you like it or not!
The accounts are taxable to their parents, however they are tax-free or taxed at a low “kiddie” rate for the first $2,200 of earnings(in 2020).
This might be for you if: you want the funds to be invested because you have a longer time horizon or you don’t want to lock your money up in a dedicated education-focused account.
I think one of the most universal sentiments amongst parents is wanting better for their children. I know Suleyman and I really endeavor to not only provide a better home life for our children, but also to give them as many financial advantages as we can without sacrificing our current lifestyle or future goals. I hope this inspires you to set up an account to help you save for your childrens’ futures.
If you need more help on determining which account might be right for you, please schedule a time to connect with me!