Saving for your child’s future is more important than ever. With rapidly increasing college tuition, as well as the uncertainty with social security, starting a tax-advantaged savings account is a must.
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Raising children costs a lot of money. Its no wonder that parents become stressed out when thinking about how to save money for kids. Baby Center has a handy cost calculator to give you an idea of what I’m talking about. Keep in mind this calculator does not take into account saving for your child’s future.
Raising a child is one of the most important jobs a parent will have. You definitely have your work cut out for you. But unlike any other investment, your return on the time you put into your child is immeasurable. Parenting is one of the greatest gifts on earth.
Time with your child is precious. All that time before they take their first steps, kindergarten, grade school, and then high school. Their first car and then off to college. This time with your child only happens once. You get one shot so use this time wisely.
Not only is this time valuable as a parent when raising your child. It’s also valuable in saving for your child’s future. Creating a savings account for your child to pay for things like college or even their first home needs to start early.
Here are 6 Tips On How To Save Money for Your Kids
1. Roth IRAs
While there is a never-ending debate as to which is better for retirement, Traditional Vs. Roth IRA, the clear winner for a child is the Roth. The reason being is, a Roth allows for penalty-free withdrawals for school expenses and buying a first home. The Roth, of course, is also a perfect solution for retirement savings.
The most important thing to know about a Roth for your child is that THEY must have earned income during that tax year. You can contribute as much as they made, up to the annual Roth IRA limit (currently $5,500). Income can include a formal job as well as things like babysitting. It will be up to you to document that they had income. The contributions may come from you or a family member but cannot exceed those limits.
Opening an IRA For Your Child
When you open an IRA for your child you will open it up under their name but you will be the custodial person until they become an adult. There are many brokers that are familiar with custodial IRAs for children. Swell Investing is a great choice if sustainable environmental choices are your thing. Otherwise, Fidelity has a great IRA package for children. You should look for an account with no fees and a low account minimum.
2. Coverdell ESAs(Education Savings Account)
Previously called the Education IRA, Coverdell accounts offer tax-free investment growth and tax-free withdrawal when used for qualified education expenses. Annual contributions are capped at $2,000 and your adjusted gross income must be less than $220,000. ESAs offer more investment flexibility than a 529 plan.
3. 529 Plan
Similar to the ESA except there are no income limits and no contribution limits. The 529 lacks flexibility in how the money is invested. In fact, 529 plans vary greatly from state to state in how they are set up. You can pick any states 529 plan regardless of where you live.
You will want to shop amongst different states to find a 529 that meets your timeline and needs. Here are the top 5 plans from Savingforcollege.com.
529s allow for tax-free growth and withdrawals, as long as the funds are used for approved educational expenses.
The Uniform Gift to Minors Act and Uniform Transfer to Minors Act are essentially a way to pass on accumulated wealth to the next generation. Like Roths and Coverdells these can be set up at most brokerages. Unlike the 529 plans, you will have complete control over how your money is invested.
5. Prepaid Tuition Plans
Many states offer prepaid tuition plans, which let you buy and lock in today’s rates. This can be a HUGE saving as tuition is skyrocketing right now. These programs offer a lot of flexibility as you are not locked into a particular school. Those funds can be used at any school, including private schools, and can be used anywhere in the country.
6. Savings Account
Don’t forget about the good old simple savings account. Shoot for the highest interest savings you can find. Acorns offers high-interest accounts that are built on your spare change making saving effortless. Read our review of the Acorns savings plan here.
Related: Microsavings Acorn App
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These are all good options and what’s right for your particular family will vary. Perhaps a mix of several options is best. The most important thing is getting started early. The power of compounding interest needs time. If you don’t start early you are leaving free money on the table.
Have you started saving for your child? What has been your favorite plan if you have already started the savings process