Every parent wants to raise their kids to be financially responsible. Luckily, there's more than one way to get them there, but with so many new accounts and apps available, it's challenging even knowing where to start. Darrin Salge, Senior Vice President and Trust Officer at American National Bank and Trust, regularly takes the guesswork out of the process for families and advises that there are benefits to saving early for their future. Below, he outlines several investment options that parents and young adults can consider while planning for their children's future.
Savings Accounts & Certificates of Deposit (CDs)
"Savings accounts & CDs offer a safe and straightforward way to start building a financial cushion for your child," says Salge.
Parents can open a savings account or CD at either a traditional or online bank with themselves as the primary or joint account holder.
"CDs can be a good option for those looking to lock in a higher interest rate over a longer period," notes Salge. "Provided they don't need immediate access to the funds." One significant advantage is the FDIC insurance, which covers up to $250,000 per depositor, providing a secure place for savings and CDs.
Custodial Accounts (UTMA & UGMA)
"Custodial accounts provide a flexible way to invest in a variety of assets for your child's future, but it's important to consider the tax implications and the fact that the funds will eventually be under the child's control," Salge advises.
UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts are custodial brokerage accounts that allow adults to manage investments on behalf of a child. Control is transferred to the child between ages 18 and 25, depending on the state laws.
Traditional brokerage account
"If you'd like more control than custodial accounts allow, you can open a traditional brokerage account in the parent's name and earmark the money for your child," says Salge.
This account gives parents access to the money while their child is still a minor, keeping control of it after the child reaches adulthood. "When you feel your adult child is ready, you can transfer the funds to an account in your child's name," he continues. "Or you could make your child the beneficiary of the account if you die or become incapacitated."
Greater adult control comes with higher taxes, though, and you will be taxed on any earnings at your tax rate, not your child's, so keep gift tax rules in mind when you decide to turn over the account funds. It may not make sense to transfer all of the account's assets at once.
529 Plan Accounts
A 529 plan is a tax-advantaged savings plan designed for future education costs.
"529 plans are highly beneficial for educational savings, offering tax advantages and flexibility for future use," explains Salge.
Contributions are not federally tax-deductible, but many states offer tax breaks. The funds grow tax-deferred, and withdrawals for qualified education expenses are tax-free. Anything left in a 529 account can roll over to another qualifying family member (such as another child). The 529 beneficiary can withdraw up to $10,000 from the account to pay down student loans.
Roth IRA for Kids
Custodial Roth IRAs are excellent for children with earned income. Parents can match contributions to the account to boost savings.
"A custodial Roth IRA can provide significant tax-free growth over time for retirement and be used for various major expenses without penalties, making it a versatile long-term savings tool," Salge says. Children hypothetically have a very long time to benefit from compound tax-free interest on funds put into a Roth IRA, including funds that may have compounded for years. Account holders can withdraw their contributions to a Roth IRA (but not the earnings) whenever without penalty.