Photo Credit: Pixabay
As a parent, it’s easy to decide to save for your child’s future. However, deciding the best way to save is a bit harder. It really depends on your purpose for saving. Therefore, before you choose how to save, determine what your ultimate goal is.
Life Experiences and Beyond
If you want your child to have enriching experiences throughout her childhood or during college, consider opening a custodial brokerage account in your child's name. This money could be used for summer camp, music lessons, a study abroad trip, or a nest egg. Commonly reserved for long-term objectives, parents usually use a nest egg for their child’s future education costs, home purchase, or retirement plan.
With a custodial account, each child can receive up to $14,000 a year from each parent without being subject to a gift tax. However, the account is still taxable under the so-called “kiddie tax” rules, which state the first $1,050 will be tax-free. Then the second $1,050 is taxed at her rate, which is usually lower than your rate. Any amount after that is taxed at your rate.
Until your child reaches a certain age, generally between 18 and 25 (depending on your state), you manage the account. Once your child is of age, she gains control of the account and can use the money however she wants. If you wish to remain in control of the savings account for a longer period of time, a trust account may be a better option.
Custodial accounts have quite an impact on financial aid, according to the Balance. Assets in a custodial account belong to your child and count more heavily. When determining aid eligibility, 20 percent of a child's assets are assumed available for college, while only 5.64 percent of a parent's assets are considered available.
While thinking about the future, you may also wish to consider whether life insurance is a viable option. Not only will a life insurance policy provide your beneficiaries with income-tax-free money, but the value also grows over time. Of course, you will likely have to pay a monthly premium for the policy, so learn the pros and cons of life insurance.
Building a Career in Business
An essential tool that has become more synonymous with high-level business jobs recently is the MBA. Obtaining this next level of education can provide you with greater career choices and increased earning potential. These changes will have a direct impact on your ability to plan for your family’s future and financial stability. Other added benefits of an MBA are expanded leadership skills, growing job prospects, and the ability to impact your family's success in other ways (inspiring and leading by example).
If you wish to save for college, a 529 plan offers two enticing benefits. First, the money grows tax-deferred, and any withdrawals are tax-free, as long as they’re used for qualifying expenses for college, such as tuition, room and board, books, and computers. Second, a 529 plan is considered a parent's asset, so unlike a custodial account, there's less impact on financial aid.
The lifetime contribution limits for a 529 are high at about $200,000. Family members and friends can contribute, and some states offer additional tax incentives. So, if you have family and friends in other states, consider shopping around to find the best 529 plan to fit your needs. The friend or family member can open one, and you can contribute.
The only way to save for retirement through an IRA is with earned income from the account holder. Once your child becomes old enough to work, she can invest her money into an IRA, and Schwab recommends using a Roth IRA account.
While your child is still a minor, you can help her get a head start on retirement savings by opening a custodial Roth IRA on her behalf. Although smaller brokerage or mutual fund companies may not offer these accounts, many of the larger ones – Vanguard, Schwab, and TD Ameritrade – will do so.
Although you can teach your child to save using a piggy bank, consider helping her save through investing. The best route of investment depends on what your main goal is for saving. No matter which option you choose, you're thinking ahead and planning for your child’s financial future, so that is a parenting win.