The Best Ways to Save for Your Child’s Future
by Randle Browning
If you are a new parent, you’ve likely spent quite a bit of time planning for the costs of giving birth and budgeting for the expenses that come along with raising a baby. But what are the best ways to invest in your child’s future?
When my daughter was born, I was so wrapped up in the day-to-day worries of life with a newborn that it was hard to find the time or energy to think about setting up her finances. And, while there is a seemingly endless supply of guides on all things related to raising kids — from sleep to baby gear to tantrums — parents can feel like they’re flying blind when it comes to the best ways to put money aside.
In this article, we’ll break down some of the different ways you can start saving for your child’s future, so you can make choices that work for your family.
Getting started with saving for your child’s future can be overwhelming. To make it easier to decide what’s best for you, you need to know what your goals are.
“The first thing to think about is what you want to invest the money for,” says Kristy Ruzner, CFP®. For many people, that means asking if you want to invest money specifically for college and other education expenses, or if you are “looking to invest more generally and have flexibility with what the money can be used for.”
Maybe you want to save for:
You don’t need to figure it all out at once, but deciding on your top priorities will tell you where to start, especially if your budget means you have to be selective with how you invest in your child’s future.
The cost of college is going up, and many parents will want to set aside money to prepare. If you have a toddler now, you could be looking at a total tuition cost of upwards of $180,000 to attend a state school by the time they’re ready for college, and much more at a private institution.
But that doesn’t mean you have to save that much to help your child. According to Money, saving for just one third of your child’s college expenses could be enough, since many students also use loans, scholarships, and grants to pay for a portion of their education.
No matter how much you plan to invest, what is the best way to start a college fund?
The obvious answer is to set up a 529 College Savings Plan. “Once the money is in the account, you never have to pay taxes on it again, as long as it’s used for qualified education expenses,” says Ruzner. You can set up a 529 with as little as $25, and make small contributions that really add up. Plus, anyone can contribute, like grandparents or other family.
You can also put money in a regular old savings account, but that might not be the best way to save for college, according to Bankrate. They won’t grow as quickly (with high-yield savings accounts capping out at less than 2% growth per year), and keeping too much cash sitting in a regular savings account could mean a lower financial aid package for your child.
Just make sure to be careful about how you spend a 529. “If you don’t use that money for things like tuition, books, or room and board, then your earnings are taxed and you pay a 10% penalty,” says Ruzner.
If you’re looking for flexibility to cover other educational expenses, a Coverdell ESA is another option. It can allow you to use the money on other elementary and secondary school costs, beyond what you can do with a 529.
Preparing for your child’s education is one thing, but what if you don’t want to be limited to using the money for school expenses? “If you want more flexibility with your savings, you could invest in a custodial account or a brokerage account,” says Ruzner. Both have some tax benefits (though a 529 is better in that regard).
A custodial account (also sometimes referred to as a UGMA or UTMA account) allows you to save money in your child’s name while maintaining full control over it. You can start a high-yield savings account, though setting up an investment account will allow you a greater opportunity to grow what you put into it. Whichever option you go with, a custodial account “becomes the child’s money at the age of majority,” Ruzner points out, “which is either 18 or 21.”
“If you don’t want to necessarily hand over all the money at a certain age, a brokerage account may be a better fit for you,” Ruzner advises. “A brokerage account is an investment account that can be used for any purpose you’d like.” It’s similar to a bank account, but typically the money in a brokerage account is invested in the stock market, and you’ll likely have a stock broker managing the investments. Brokerage accounts serve a lot of purposes, but you can use it to invest in your child’s future schooling expenses.
Another option? A Roth IRA. If your child earns income, they are eligible for a Roth IRA. If you want to continue saving for your child’s future once they’re old enough to join the workforce, this is a great option. (And if your kid becomes a baby YouTube star, they’re eligible too!)
To decide what’s best for you and your family, it’s always a great idea to talk to a financial advisor about your timeline and your goals. There are different risks and tax implications involved with each option, and it’s important to understand what you’re getting into before you put your money on the line.
When my daughter was born, we set up a 529. But when relatives and friends generously sent us checks in our new baby’s name, we didn’t know where to put them. While many financial planning options allow for any adult to contribute, we wanted a designated place to put unexpected gifts like these. We were able to set up a high-yield custodial account for that purpose.
Keep in mind that you don’t necessarily have to use just one type of savings or investment. So, what are some other ways you can plan for your child’s financial future?
Another one of the best ways to invest in your child’s future is to set up a trust fund. While we typically associate trust funds with the ultra-rich, there are options that could work even if you’re not extremely wealthy.
Though it might not be the first thing you think of, you can also set aside money for your kid’s future medical expenses. If your adult children are still on your medical plan, and you have a qualified high-deductible plan, you could set aside money for healthcare costs with major tax benefits. Just make sure you speak to an advisor and learn exactly what happens if you don’t end up needing the money for medical expenses.
While you’re saving for your child’s future, there’s another thing to consider — your child’s relationship with money.
Another one of the best ways to invest in your child’s future has nothing to do with your money at all. Part of a healthy financial future is learning how to manage money. While teaching your kids how to spend and save can feel like a burden to already stressed out parents, it doesn’t have to be a huge undertaking.
You can start with giving your child a joint checking account (with a very low balance, since your child will have total access!) and including them on processes like checking the balance and reviewing statements. Or try out these budgeting tips for kids that can be easy for you and fun for your child.
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