by Rick Pendykoski
Everything related to kids comes with a hefty price tag. Be it school, healthcare or higher education. A surprisingly huge number of parents have only a vague idea about the options available when it comes to saving for their child’s future.
The very first step you can take is to start investing as early as you can. This ensures that your money has more time to grow. From a kids savings account to a college savings plan, there are many smart options to save for your child’s future. Some of them are described below:
Separate Savings Account
Start a separate savings account. Even though the interest rates are low and whatever interest you earn is taxed as income, an FDIC-insured bank savings account is one of the safest options. Give the account a nickname such as ‘My Child’s Fund’. This can help create an emotional connect that may encourage you to save more.
Roth IRA Plan
You have the option to open a Roth IRA in your child’s name if he or she has an earned income. This is a great choice for your teenage kids, since part-time jobs count. This Roth IRA account ensures that your kids will get tax-free money when they retire. Besides, these funds can be utilized for qualified college costs, which is not possible with other retirement accounts. Even though your child will have to pay taxes on the earnings, he or she won’t have to pay an early withdrawal penalty.
Some companies offer work perks which can add to your savings for your child’s future. For instance, great discounts on daycare or useful items like laptop if your child is in high school or college. So take a closer look at the perks offered at your workplace. You might be missing out on a great opportunity to add to your efforts of saving for your child by being unaware of those perks.
529 college savings plan and 529 prepaid tuition plans are some of the best options to save for your child’s higher education. The funds in the college savings plan can be used at any accredited school of the USA. Withdrawals are tax-free. The advantages of a 529 college savings plan is that it can be used by anyone as there are no restrictions of an annual income and you can change the beneficiary without incurring a tax penalty. The prepaid tuition plan allows you to ‘lock’ future tuition costs at today’s rate to save money. However, these plans are not available in every state, so you need to do your research.
Look for savings options beyond those which are exclusive to education. For instance, you can start investing in a taxable brokerage account. You can choose from varied investments and make withdrawals at any time. However, the value has to be included in the financial aid calculations.
You can also consider investing with a UTMA (Uniform Transfers to Minors Act) or a UGMA (Uniform Gifts to Minors Act). As a parent, you can set up a custodial account and later make withdrawals to cover your child’s expenses. Once he or she is of legal age, the control of both these types of account is to be handed over to him or her.
Since your children will have to be on their own at some point or the other in future, it’s best to set them up for success from an early age. The best step you can take to secure your children’s future financially is to start teaching them the value of money and importance of savings, right from their childhood.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement. You can also find his writing on Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at [email protected]