Parents nearly always have to make financial adjustments after having a child. Raising children can be expensive, from purchasing birthday gifts to paying for extracurricular activity fees.
“If you look at the cost of college, that number is pretty staggering,” says Kara Duckworth,
College is just one expense parents have, though. Once the child reaches adulthood, there can also be wedding costs, medical bills, and camp fees. It’s critical to get kids started saving money as early as possible, whether your goal is to instill in your child sound money management techniques, assist in their college costs, or prepare them for financial success as adults.
- Establish a children’s savings account.
Parents can co-own children’s savings accounts with the majority of banks and credit unions. These accounts can aid in forming the habit of conserving money rather than squandering it in children.
“What a lot of people do is open a separate savings account,” says Trevor Stone, a senior adviser with the Compardo, Wienstroer, Conrad and Janes office of St. Louis-based advising firm Moneta. It’s the most fundamental strategy to save for kids, according to Stone.
Parents could prefer to set up recurring allowances transfers to their child’s savings account as opposed to giving them cash as an allowance. In addition to generating interest, this can motivate kids to actively manage their finances.
2. Use a 529 College Savings Plan or Prepaid Tuition Plan as leverage
The majority of financial experts appear to concur that a 529 plan is the most effective approach to save money for a child’s college expenses. The accounts have tax advantages, and many plans have affordable fees.
Two different kinds of 529 plans exist. One is a general college savings program, which enables parents to deposit money into an account that may be utilized at any accredited private K-12 school or college. Contributions to a state’s 529 plan may be tax deductible in some jurisdictions, and withdrawals used for qualified educational expenditures are excluded from federal income tax.
The alternative is a pre-paid tuition plan, which guarantees current public institution tuition rates.
While being able to lock in tuition costs is a useful perk, most families might find the college savings option to be more flexible and a better alternative overall.
In either case, make sure you are aware of any restrictions on how the money in the account may be used. “You can’t use a 529 plan for travel (to programs abroad) or for getting back and forth to school,” adds Duckworth. A tax penalty can apply if money is withdrawn for unqualified purchases.
3. Investigate ABLE Accounts
Opening an ABLE account may be desirable for parents of children with disabilities. These relatively new accounts, which were established by legislation in 2014, will accept up to $17,000 in contributions in 2023. The money in the account increases tax-free and can be withdrawn tax-free for qualified expenses, but there is no federal tax deduction for contributions.
The primary advantage of the account is not that, though.
“The great thing about ABLE accounts is that they don’t count against government assistance,” claims Duckworth. Therefore, parents can make savings for their kids without accidentally affecting those kids’ eligibility for government assistance programs like Medicaid or food stamps.
An ABLE account is only available to people who become disabled before they turn 26.
4. Employ a Roth IRA
It may not seem like a good idea to use your retirement funds to support your children, but as long as it is done with careful preparation, it can work. If you’re looking for the finest flexible savings plan for child expenses, Roth IRAs may be a wise decision.
People can save after-tax money for retirement using a Roth IRA. Workers under 50 can save up to $6,500 in 2023, while those over 50 can contribute $7,500. A 10% tax penalty is applied to any gains that are removed before age 5912, even though money withdrawn after that age is tax-free.
Roth IRAs provide some flexibility because the capital can be withdrawn whenever desired, tax-free or penalty. Because the principle amount can be withdrawn at any time without incurring taxes or penalties, Roth IRAs provide considerable flexibility. You might utilize all or a portion of the funds deposited into a Roth IRA, depending on your age, to pay for your child’s college education or other costs. However, if you want to empty the account, be sure to have a backup retirement savings plan, such as a 401(k).
There are income restrictions for those who wish to contribute to a Roth IRA, but wealthy families can access these funds using a backdoor Roth IRA technique. The possibility for married couples filing jointly with incomes of $218,000 to make contributions to a Roth IRA starts to taper out in 2023.
5. Put money aside in a trust fund
Parents may choose to use a trust in place of custodial accounts to get around their drawbacks. According to Stone, trust accounts can be highly flexible in how you create them and restrictions can be put in place about the use of the funds and when they can be accessed.
Money, according to Klingelhoeffer, “is an amplifier.” It has the potential to be beneficial in the right hands, but it also runs the risk of aggravating issues for a child who uses it carelessly or spends it on unhealthy habits. What he says is that he doesn’t want money to be harmful to people.
That issue can be handled via a trust fund. Any amount of money can be used to set it up, but unless you have a lot of money to put into it, it usually doesn’t make sense. The trust agreements must be drafted by an attorney, and a trustee manager must be chosen. To create one, budget at least a few thousand dollars.
However, a trust fund gives wealthy families more control over distributions, protects money from creditors, and makes sure a child’s assets aren’t divided during a divorce.