How To Save Money For Your Children

Whether you want to get ahead with teaching your children to be smart with money management, help them pay for college, or set them up for financial success as adults, it’s a good idea to get started with saving for your children as early as you can. There are lots of ways that you can save money for your children and their future. 

There are lots of options, from different kinds of savings account, trust funds, and bonds with a bond yield calculator. 

Create A Children’s Saving Account

Most banks offer some kind of savings accounts for children, which the parents can co-own. Accounts like this can help children to develop skills and habits for saving money, instead of spending it. 

A savings account has a big teaching advantage. A parent can set up recurring transfers into the savings account and children can play a more active part in managing their money, while earning some interest at the same time. 

As your child gets older, they could be moved onto a teen checking account and given a debit card. These cards designed for teens have a lower spending and withdrawal limit. Parents can remain as co-owners of teen accounts, allowing them to oversee and help with managing the money as they’re needed. 

Open A Custodial Account

A custodial account is the best option for parents who want to save money for their children, but don’t want the child to have access to the money until they are adults. The money in these accounts is held in the child’s name, but the parent manages the account. They can also be used to allow children to own securities or other assets that might otherwise not be an option with a child’s account. 

Custodial accounts don’t provide the same tax benefits as other savings options, but there can be a good choice for parents who don’t know if their child will choose college or those who want to give a financial gift when the child reaches adulthood. When a child reaches the age of majority as governed by their state, the money from a custodial account is transferred to them. 

Leverage A 529 College Savings Or Prepaid Tuition Plan

College savings are incredibly important to have in place, but many parents don’t make use of 529 plans. Only 44% of parents with children aged between 8 and 14 are using 529 plans, accordion to a survey from the financial firm T. Rowe Price, despite the fact the 529 plans are one of the best ways to save for college. 

There are two kinds of 529 plans. One is a general savings plan for college that allows parents to put money into an account to be used at any school, including private K-12 institutions. Some states offer a tax deduction for contributions into a 529 plan and withdrawals for education expenses are exempt from federal income tax. 

The other option is a prepaid tuition plan that locks in the current tuition rates for public institutions. The ability to lock in those tuitions rates is a very valuable benefit, but this option is less flexible than the college savings, so may not the right choice for a lot of families. 

Open A Coverdell Education Savings Account

Coverdell education savings accounts are similar to 529 plans. They allow parents to put aside money for education expenses, including college costs and private tuition fees for grades K-12. Contributions to a Coverdell account are limited to $2000 a year and are not tax-deductible. Withdrawals for qualified educational expenses are tax-exempt. 

Before 529 plans were created, Coverdell accounts were one of the best ways to save for the college expenses of your child. Since the introduction of 529 plans, they have become less popular. 

Coverdell remains an option, but a 529 may be better. 529 plans don’t specify a contribution limit and may offer a tax deduction, which the Coverdell education savings accounts don’t offer. 

Use Your Roth IRA

It might not seem like a very smart plan to dip into your savings for your own retirement, but many finance experts say that there is no reason that you can’t use a Roth IRA to cover education expenses. You need to save money both college and retirement, so combining those funds is fine to do as long as you do with a proper plan in place. 

A Roth IRA allows people to save after-tax dollars for retirement. Workers under the age of 50 can save up to $6000, while those over 50 can contribute $7000. If you withdraw money after the age of 59, it is tax-free. The principal amount can be taken out at any time without any tax or other penalty. Before 59, withdrawing any gains will result in a 10% tax penalty. Depending on your age, you could use or all of the money in your Roth IRA for your child’s college expenses. If you plan to do this, make sure you have another source or savings for your retirement, like a 401(k).

Open A Health Savings Account

If you have adult children who are covered by your high-deductible health insurance plan, a health savings account is another possible option for you to think about. A health savings account is the only triple tax-free savings tool in America at the moment. 

If you have a qualified high-deductible family health insurance plan, you can contribute up to $7000 in 2019 to a health savings account. This money is tax-deductible, grows tax-free and can be withdrawn for any reason and only be subject to regular income tax, the same as a traditional 401(k) or IRA. 

A married couple can only open one health savings account, but each adult child that is covered by a family plan is still able to open an account of their own. Anyone can make contributions totalling up to $7000. While there are limitations to how this money can be used, an account dedicated to health care costs can help to smooth your child’s progress into adulthood. The best time to set up a health savings account is when you don’t need the money. 

Set Aside Money In A Trust Fund

Trust funds are less common than the other options listed here, but they are another option for parents wanting to save money for their children and their future. Most people don’t have access to a trust fund, as most of aren’t wealthy enough to have had one started for us. 

A trust fund can be set up with any amount of money, but in most cases, it doesn’t make sense to start one unless you have a large amount of cash to deposit into it. An attorney will need to draw up the trust documents for you. You will also need to appoint someone to manage the money. Despite the complexities, for wealthier families, a trust fund offers a lot more control over disbursements, protects money from creditors, and make sure that your child’s assets aren’t split in the event of the parents divorcing. 

It’s a good idea to save what you can for your child’s future. College is expensive, and being able to help with those expenses could allow your child to continue their education. For children who decide against college, the money could be very helpful for funding other educational expenses, helping with buying their first home, or for other costs like a first car or a wedding. Help your child have financial security in the future.