Saving for your child’s future can provide security, hedge against emergencies, and create opportunities to teach them financial management lessons. A common rule of thumb is to multiply your child’s age by $2,000 to determine annually how much to save for their college education. Not everyone can put aside that much, and the good news is that there are other options to put funds away for college and other emergencies.
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Kids Savings Accounts
Kids saving accounts are what the name implies. A savings account for your child that a parent or guardian can begin one as early as they choose. Your child is unlikely to have met the age requirement to open one, so there is usually a parent or guardian’s name needed for the application. You will most likely need the same information for your child, as you would if you were to open a savings account. The benefits of having a savings account for your child is that it teaches your child the value of a dollar, how bank accounts work, and responsibility.
As with most things, there are drawbacks. Once the child turns the age of 18, the money is theirs to spend on what they want. If they are going to college or technical school and require financial aid, there may be penalties because the money in the account will count as the child’s assets. Depending on account earnings, they may have to file a tax return. The IRS counts unearned income as apart of income tax returns, and that includes dividends, capital gains, and disbursements from trusts. Below are some popular kids’ savings accounts.
- The Boeing Employees Credit Union (BECU) – Depending on how large your deposit is, these accounts can generate from 6-10% interest. This is open to Boeing employees, however, residents of Idaho, Washington, and Oregon can also apply. If you are not a resident of those states, there are a few exceptions to qualify.
- Capital One’s 360 Kids Savings Account – This is a no minimum balance to open or maintain the account. Parents can link their accounts, and you can set up savings goals for your children so they can see how their money is growing.
- Citibank – They offer two different savings accounts that accommodate your savings amount and style.
- Alliant Bank – This savings account for kids is excellent for those ages 12 and under and they also have savings accounts just for teens.
The common belief is that trust funds are just for the wealthy who have substantial assets. This is not the case; trusts can create wealth and leave a legacy behind in assets such as cash, stocks, bonds, and property.
First, you will need an attorney who specializes in trusts to set it up. The most common trusts are revocable and irrevocable trusts and your situation will dictate what kind of trust you need. If you have a 401K through your employer, that asset is one you can designate to a trust. If you own your home, you can put that in your trust too. Another benefit of having a trust fund is that you can pass your assets onto your heirs without the hassle of probate; another benefit is if you worry about what your children would do with the funds when they turn 18 years old, you can establish guidelines when and under what circumstances they can withdraw or use have access to those assets..
Drawbacks of a trust are the expense — they are more expensive to set up than a will, and there is much paperwork that goes along with setting one up. You will report income from assets within a trust on your tax return and you will have to maintain detailed records.
A custodial account can be a savings account, a college savings account, or more often housed with a brokerage or investment firm that manages securities and other mutual fund accounts. The account is in the child’s name but a parent or legal guardian manages it. Custodial accounts can offer a wide selection of investments to choose from; if managed right, it can earn more interest than a bank account. For those who are not in a position to set up a trust, this is an attractive investment vehicle alternative.
The drawbacks are the fees associated with the securities transactions and the broker fees if you use one. If you use an investment strategy, the account will be subject to fluctuations in the market and you may lose money depending on your situation.
Health Savings Accounts (HSA)
An HSA is a health savings account and covers medical expenses that insurance does not, such as copayments. You can include yourself, your spouse, and your children in your HSA plan, and, once your child reaches adult age and files and income tax return, they can open their own HSA accounts.
The benefits of owning an HSA are tax deductions, and that the IRS does not tax interest earned. If your adult child contributes to his or her own, they will receive the tax deduction. If you do not use all your funds that year, the good news is they roll over, so you don’t lose your contributions or any interest.
The drawbacks to these accounts are that you must qualify according to IRS stipulations, and you can only use the money for qualified medical expenses. You can withdraw your funds from the account at age 65 but you will be subject to taxes with any withdrawals. Examples of companies and banks that offer HSAs include:
- Health Equity – This company offers the benefit of investments for your HSA, which can be helpful for those who want a tax shelter and growth potential to pay for qualified medical expenses.
- HSA Bank — This option may work better for those who do not want an investment feature. Additionally HSA bank will work with you to combine HSAs if you have more than one.
- Bank of America – They have HSA options and have information on scenarios such as planning for your teen’s braces.
A 529 plan is a college savings plan for your child. This is a great way to put money back for qualified education expenses for your children while receiving a tax deduction for your contributions. They also grow tax-free, and there are no taxes when you withdraw the funds for qualified education expenses.
The downside to having a 529 is you can be penalized for using the funds for anything other than educational expenses. Along with the 10% penalty, the funds are subject to income taxes. The investment options are not as broad as other investment vehicles, and if you start late, your time horizon will be short if your child is entering college within a few years.
It is essential to research the requirements on contribution limits, and other implications such as whether your state income tax laws (if any) allow for a deduction. Other than that, there are no requirements to open one. Examples of states that offer 529 plans include:
- California – Has the ScholarShare savings, TIAA-Cref manages the investment funds, and they offer a low maintenance fee.
- New York – New York’s 529 plan is also managed by TIAA-Cref and offers several investment options.
- Utah – My 529 has performed well over one, three, five, and 10 year rolling periods. This state also offers a state income tax deduction.
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