When you were growing up, you had a piggy bank filled with coins and a few bills. Your folks likely had a savings account for you that they encouraged you to make deposits into now and then, but beyond that, you didn’t really have any other financial plans or programs.
Now that you are a parent, you want to take steps to financially prepare your child that go well beyond a cute pink piggy bank and a neglected savings account. With this in mind, let’s look at the different types of financial accounts that parents should consider setting up:
529 Savings Plan
Here’s the understatement of the year: college is really expensive. If you don’t want your kiddo to deal with a huge amount of student loans and/or you are understandably concerned about paying for tuition yourself, set up a 529 savings plan when your kids are really young. All 50 states currently offer at least one 529 plan. While the individual limits vary from plan to plan, some states include lifetime limits of $300K or over, and every year, you can contribute up to a maximum amount without triggering a gift tax. The main advantage of a 529 savings plan is that your contributions to your kiddo’s college fund will grow in a tax-deferred account. Then, when your child is ready to head off to college, as long as you use the money in the account for qualified school-related expenses, the withdrawals are tax-free.
A Classic Savings Account
In addition to a 529 Savings Plan, you can also open a savings account for your child. You can use the account to also help save money for college, or you can use it to help your kiddo learn how to set aside money in a safe spot for items he or she is saving up to buy. As a bonus, grandparents and other relatives who wish to contribute to the savings account can do so; all they need is the account number and they can make deposits for birthday and holiday gifts and to help fund the college savings. One thing to keep in mind is how large the savings account is growing; because financial aid is determined based on income and assets, teens who end up with a pretty large savings account may end up being offered less money from a college or university.
A Stock Investment Account
Buying stock for your kids is a great way to teach them about money. Minors can’t purchase stock, so you’ll have to do it for them, but you can open either a guardian account that allows you to retain ownership of the account, or a custodial account, in which your child owns the account. Once your child turns 18 or 21, depending on where you live, the custodial account assets will be under his or her control. You can explain how owning stock in a company works and then your child can choose which ones he or she would like to own. Kids often get a kick out of selecting stock from companies they like—for example, Hasbro, McDonald’s and Starbucks.
Be Diligent About Protecting Your Child’s Savings
Kids are not immune to identify theft. Now that you are busy opening at least one type of account for them, you should also take steps to ensure that their personal data does not fall into the wrong hands. One way to do this is to set up an identity theft protection plan for the entire family. This way, if some cybercriminal does get a hold of your child’s savings account number, you’ll immediately be alerted that something is amiss so you can take steps to rectify the situation.
You are Never Too Young to Start Saving
While your children can still keep their piggy banks, it is definitely a smart financial move to open formal savings and investment accounts for them as well. In addition to teaching them about the importance of savings and stocks, when they are ready to head to college someday you should feel less of a financial sting.