Starting a family often means making financial adjustments and managing money in a way that suits many, not just one person. What’s more, no matter where you live or how many kids you have, raising children can be very costly. That’s why it’s important to know the best way to save for a child and the options available to parents. Luckily, at BusyKid, that’s what we do.
From savings accounts to Roth IRAs, college plans, and more – let’s take a closer look at what is the best way to save for a child and what to consider beforehand.
Best Way to Save for a Child
There are many different reasons why you should start saving for your child and many different ways to go about it. Let’s take a closer look at some of the popular ways parents choose to save for their children.
Making a Financial Plan
Before taking any steps toward saving, you need to create a financial plan and decide on your goals, budgets, and more. Ask yourself what exactly you want to save up for and what your savings goals are.
For example, do you want to help pay for college education, books, or medical expenses? Do you want to help your kids buy a car or home when the time is right? All of these things will go into making your financial plan as will any inheritances or a will you might for your child.
If you’re unsure what your goals are, talk with your partner, friends, or family, or even consider hiring a financial advisor. Getting other opinions might help you formulate a better financial plan.
Setting up a Savings Account
A parent can open a savings account at an online or traditional bank for a child of any age. It’s easy to contribute to a savings account both in-person and through digital deposits. You could even set up automatic transfers from one account into the savings one.
In many cases, both the adult and minor account holders can access the money at any time. However, parents should keep an eye on account activity while teaching kids smart saving and spending habits.
Starting a 529 Plan
College tuition can be pretty expensive, which is why many parents decide to start saving for it while the child is still young. A 529 account is a tax-friendly way to help parents do that.
Even though contributions to a 529 plan are not tax-deductible on a federal level, most states do offer tax breaks for contributions. What’s more, funds inside the account can grow tax-deferred. But most importantly, withdrawals made for qualified educational expenses are federal income tax-free.
That said, if you use the money inside the 529 plan for something other than education expenses, you might have to pay federal income tax, as well as a 10% penalty on any withdrawal of earnings.
Creating a Trust Fund
Trusts can also be a helpful way to save for a child and they’re not just for those in the top tax bracket. Trusts are legal agreements that allow a third party to hold assets on behalf of one or more beneficiaries. With trusts, there could be conditions for using the assets.
It’s also important to note that trusts can be both revocable and irrevocable, depending on your financial goals. A revocable trust can be changed, amended, and even revoked and it’s commonly used for estate planning services. An irrevocable trust on the other hand can’t be changed once it has been created.
Some parents choose to create irrevocable trusts during their lifetime and name their child or children as primary beneficiaries. What’s more, many parents choose to make flexible distribution provisions that include paying for their child’s health, education, or general support.
Opening a Roth IRA
A Roth IRA is a retirement account that allows anyone with an earned income to make after-tax contributions. As the account is tax-advantaged, it means that the beneficiaries can withdraw from the account tax-free. Even though most people use a Roth IRA to save for retirement, the account is very flexible and can be used for other purposes, like saving for a child.
With a Roth IRA, you can withdraw contributions at any moment. However, if you don’t want to pay the penalty, you can only withdraw earnings when you reach the age of 59 ½. Your account also needs to have been open for five years.
Keep in mind that there are certain exceptions. For example, you as a parent can withdraw the earnings in a Roth IRA to pay for qualified educational expenses without paying the withdrawal penalty.
Opening a Health Savings Account
A Health Savings Account or HSA can be the best way to save for a child if you’re trying to save for medical expenses. It is a highly tax-advantaged investment account that can help ease the burden of expensive healthcare.
With an HSA, you can make tax-free contributions and the money inside the account would grow tax-free. You could also withdraw it tax-free when making qualified medical expenses. But with an HSA, keep in mind that the accounts are only available to parents or guardians with high deductible health insurance plans.
Creating a Custodial Account
Parents or guardians manage custodial accounts, like Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, until a child reaches the age of maturity. Parents or guardians can make contributions in the form of cash, and investments. Also, for UTMA accounts, parents or guardians can contribute real estate.
If you’re saving for college, a UGMA or UTMA account might not be the best way to save for a child. That’s because assets in these accounts are considered when applying for financial aid. On the other hand, they can be a good choice for your child as there are no restrictions on how the money inside the accounts is used.
Final Thoughts on the Best Way to Save for a Child
The best way to save for a child will depend on many factors, including your goals, financial ability, when you start saving, and more. So before you commit to any of the choices, make sure to do your research so that your preferred method aligns with your goals.
If you want help teaching your kids to earn, spend, save, and invest – BusyKid is the place for you. With our powerful app and suite of features, we can help give your kids financial literacy while teaching them money management.
Download BusyKid to learn more and get a head start on your children’s financial future.
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