Tools to Set Up Your Children for Financial Success
There are so many things to consider when having children such as their health, daycare options, private vs. public school, sports, etc. It can be tough to manage all the different aspects of parenting let alone helping them prepare for a successful financial future. Here are some easy things you can do to set them up in a way that will allow them to kick-start savings.
College Savings Accounts
There are a few different vehicles for college savings that will allow funds to grow tax-free. You can find a list of these below.
529 Accounts Can Set Up Your Children For Financial Success
These plans can be used at eligible institutions including accredited colleges, universities, trade schools and can even be utilized for tuition expenses for elementary, middle or high school ($10K/yr. max). These accounts are invested so you can participate in the market while receiving a shield from capital gains taxes when you need the funds. When making contributions, they are considered completed gifts for federal tax purposes ($17K per beneficiary in 2023), but the IRS allows you to “Superfund” the account. With this election, you can use five years’ worth of annual exclusions on an initial contribution (Contribution potential of up to $170K in one year for Married Filing Jointly). You must utilize the account for qualified expenses such as tuition, books, fees, supplies and room and board. This type of account does have the flexibility of changing beneficiaries within the family if they do not end up utilizing the account. A previous worry with these types of accounts is overfunding, but SECURE 2.0 now allows any excess funds not used for college to be rolled over into a Roth IRA for the same beneficiary. Limitations on this include that the plan must have been opened for 15 years, the Roth IRA owner must have compensation of at least equal to the amount of the rollover, transfers are capped at the contribution limit each year with a lifetime limit of $35K.
Pre-Paid Tuition Plans Help Increase Future Financial Success for Children
There are state sponsored programs that allow you to pre-pay tuition now and those funds are guaranteed to cover the cost when your children go to college. These are a great way to invest in your children’s college and protect it from inflation. A downside of these accounts are that they will only be eligible for use at schools in the state.
Minor Roth IRA Accounts Can Help Boost Your Childs Financial Success
If a child has earned income and you would like to begin saving for their retirement, you can open up a Minor Roth IRA. Earned income can include self-employment jobs such as baby-sitting or dog walking. These do have contribution limits of up to the lesser of earned income or $6.5K for 2023. After minor reaches age of majority (state dependent; usually 18 or 21), this account is turned over for them to manage. This is a great opportunity to begin building post-tax retirement money that can be continually added to throughout adulthood.
UTMA/UTMA Accounts For Your Childrens Financial Success
These are two types of custodial accounts that allow you put assets in the name of a child. The only difference between a UGMA and an UTMA, is a UTMA can hold physical assets such as real estate, jewelry, etc. You have custody and control of the assets until the child reaches the Age of Majority (state dependent; usually 18 or 21) and assumes legal ownership of the account.
Learn more: Upcoming Changes to Student Loan Repayment.
Any money put into this type of account must be used for the benefit of the child and is an irrevocable gift (gift tax rules apply). Any realized gains or income from investments will be subject to taxes. These types of accounts are a great way to begin your child’s investing journey as you have an open architecture for investment types.
Traditional Savings Accounts
Now is a great time to open a savings account due to the high-interest rate environment. Some high-yield savings accounts are offering 4%+ APY. You will be subject to taxes on any interest received.
Money Market Funds Can Help With Future Fincial Success of Your Child
Many banks and custodians offer Money Market funds which are currently offering 4.75%+ APY. These are very liquid money market mutual funds but do need to be purchased into and sold out of when the funds are needed. No capital gains taxes are applicable, but you will be subject to taxes on the interest from the fund.
Certificate of Deposit (CD)
Another option to take advantage of the current high yields is to open a CD in the child’s name. You can generally get a higher yield on these vs. a savings account but the funds are locked in. Maturity can range anywhere from 90 days to 5 years. You will be subject to taxes on any interest received.
Use These Tools To Increase Your Children’s Success Financially
Utilizing these tools alongside teaching your children money basics by saving and budgeting, they will have the framework to be set up for financial success in their adulthood. There are many other options available, but we wanted to highlight some of the easiest and best options out there.
If you have any questions regarding the features of these savings and investing vehicles, please contact Fortis Financial Group for in-depth details. We can tailor these different approaches to savings based on your personal and financial situation.