Saving money for your children’s future and educational needs is often an investment priority, but the choices involved in setting up to do this can be overwhelming.
Ideally, you’d start the savings and investment process long before your child is born. But each family has a different set of financial circumstances and goals. Be advised, however, that saving for your children’s future should not take precedent over your own retirement, savings account or emergency fund.
You may think it’s your financial duty to help your children, but as we’ve learned from the airlines you need to put your own needs first before assisting your children. Before you decide on an investment option for your child, consider the following:
- Who has ownership of the account? (parent or child)
- Which type of account do you want? (college savings plan, mutual funds, etc.)
- What do you want to invest in? (stocks, index fund, etc.)
The following top five investment options are important ways to ensure your children’s future.
UGMA and UTMA accounts
The Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are accounts that you control but are owned by your child. You control the accounts until the child is typically 18, and in some cases 21 or 25 for UTMAs. Investment contributions include money, stocks, life insurance or annuities. There are no restrictions on how funds are used as long as they directly benefit your child. Tax rates vary, with the first $950 tax-free, the second $950 taxed at the child’s income tax rate and the remainder taxed at the parent’s income tax rate.
529 College Savings Plans
Saving for future college expenses is always a top investment for children. 529 College Saving Plans allow you to invest after-tax money that grows and remains tax-free if used for qualified education expenses. This includes tuition, room and board, fees, books and supplies. Money spent on anything else is subject to a 10 percent penalty on earnings, as well as to the income tax. Through an array of investment options, 529 college saving plans operate similarly to IRA and 401(k) plans. Age-based investment packages are also available to reallocate from aggressive investments to more conservative ones over time. Note: 529 College Savings Plans belong to you, not your child.
Prepaid Tuition
If you are fairly certain your child plans to go to college or university, look into prepaid tuition options. Essentially you lock in current tuition rates and pay that price in the future. States that offer the option also let you use the tuition at any school in the country, including private colleges. You can also transfer ownership of the account to another child.
Brokerage Accounts
For maximum flexibility and potentially high returns, open a brokerage specifically for your child. You retain control of the account and use your after-tax income. One of the easiest ways to set one up is to link it directly to your paycheck and make automatic, biweekly contributions. Choices for aggressive and conservative investments vary, so keep in mind your personal time frame and risk factors.
Savings Account
A traditional savings account set up for your child is a conservative investment strategy that can complement other more aggressive investment opportunities. While traditional savings accounts offer relatively low interest rates, they are also an opportunity to teach your children the basics of saving. You can set up the account in your name or your child’s name. Remember that you should first ensure your own financial future before investing for your children. Also keep in mind the future implications of having too much money in your children’s name for financial aid and other tax factors. Setting aside money for your child is an incredibly worthy and wise decision, just make sure it’s the right time!
