The Best Way to Save for a Child’s Future

One day your child will start their way in the world. As a parent, there are various financial tools you can use to help invest in your child’s financial future, whatever path they take. Read on to look over options to start planning for your child’s major financial events.

Savings account

A savings accounts is a good starter account for your child. As your child gets older, you can use the account to help teach them the benefits of saving. One reward for moving your child’s money from their piggy bank to a bank or credit union is the monthly interest the balance will accrue. Showing your child their bank statement and the interest earned in their account can get them excited about saving money.

Introduce the idea of a budget. To motivate your child to follow a budget, see if there is a particular item they want to buy. You can then help them figure out how to save up for the item and break down the savings process over time. For example, if a Lego set costs $30 and they set $6 a week aside from their allowance, it would take five weeks to purchase the set. You can discuss various savings scenarios to come up with a plan on what budget works best.

Pre-teens and teens may benefit from having both savings and checking accounts. Teach your teen learn how to use a debit card and balance a checkbook. Minors under 18 need a parent or guardian on their accounts, so as a joint owner, you can track their spending through your online banking to ensure the account is in good standing.

UTMA account

Many credit unions and banks offer youth custodial savings accounts, referred to as a Uniform Transfers to Minors Act (UTMA) account. With an UTMA account, the custodian manages the account, meaning that the minor cannot access the funds, get balance information, or withdraw money. Only the custodian is authorized to conduct transactions on the account. Depending on state law, this type of account may be a good option for parents who wish to save money that their child cannot touch until they are an adult.

529 plan

A 529 plan is a tax-advantaged investment tool used to pay for educational expenses from kindergarten through college. The funds can be used to cover room and board, tuition, and related educational costs such as textbooks. If the money is used for K-12 expenses, you are limited on what you can withdraw from the plan each year.

Contributions into the plan are after-tax with tax-free withdrawals if used for qualified educational expenses. The IRS does not specify contribution limits, but each state has maximum contribution limits. One bonus is that contributions aren’t just limited to parents, so anyone can make a gift.

Coverdell savings account

Coverdell accounts have tax-advantaged options to help save for kindergarten through college. Money contributed into a Coverdell can be withdrawn tax-free if used to cover qualified educational expenses such as tuition, fees, books, and supplies and equipment. Up to $2,000 per child per year in contributions can be made in this account by a parent, grandparents, or anyone else who would like to contribute. The final distribution from a Coverdell account must be used before age 30, but if any funds remain in the account, they can be transferred to another beneficiary under age 30.

Savings bonds

In the past, family or friends would go into their financial institution to purchase a savings bond to give as a gift. Nowadays, credit unions and banks do not issue bonds but may help their members redeem them

To purchase a bond for children under 18, a parent or guardian will need to create an account for their child on TreasuryDirect that can be linked to their own account. The parent/guardian can purchase, redeem, receive gift deliveries, and perform other transactions on behalf of the minor. Once your child turns 18, the account can be disconnected from the parent/guardian’s account so the minor can establish the account as their own. The most common type of bond purchased is a Series EE Savings Bond, which will earn interest for up to 30 years or whenever it’s cashed in. Unlike a 529 Plan or Coverdell Savings Account, bonds are not exclusive to education but can be used for anything. If a bond is used for educational expenses, it must be used in the same tax year the bond is redeemed to receive a tax break on bond payments.

Individual retirement account

Typically, money set aside in an individual retirement account (IRA) is used to help supplement your income during retirement. This should never be your first choice because every withdrawal shrinks the nest egg you will need when you no longer have the capacity to earn. However, if you’d like to dip into those funds before retirement, there are certain penalty-free withdraws you could do to help your child with major life events.

One type of qualified withdrawal would be to pay for higher educational expenses (attending a college, university, or a post-secondary school). The covered expenses would be things like tuition, books, fees, and school supplies. If a withdrawal is made for this purpose, you will not be liable for the 10% early withdrawal fee. To investigate more specific details on withdrawing money for attending college, consult the IRS website or a tax advisor.

Wrap up

Investing in your child’s future comes in many forms, from teaching them money management skills by opening a bank account to providing them with money to start the next chapter of their lives. The bank account, to me, is the crucial first step that can set other financial goals in motion. It’s how your child starts transacting with the world around them, becoming a part of the economy. Learning how to manage money can help your child achieve their own financial goals, setting them up for whatever future success comes their way.