Saving for Your Child’s Future

Millennial parents have many ways to save for their child's future including 529 plans, retirement accounts and trusts.As Millennial parents, many of us spend a lot of time planning for a baby and then for the expense of raising a child. But, what about once that child grows up?  Is there something you can do as a parent to help save for college, their future retirement or just a little something extra?  If you have the means, you certainly can!  You can do that with things like 529 Plans, Roth IRAs and other methods to save for different purposes.  However, a word of caution: don’t sacrifice your future for theirs.  Your child can take out a loan for college, but you can’t take one out for retirement.  Make sure that if you want to help your child, you are planning for it in the context of your own goals as well. I know so many of us would do almost anything for our children, but it’s ok to prioritize yourself sometimes. Here are some different ways to save for your child’s future.

College Savings Accounts
If you want to help your child pay for college, a 529 College Savings Plan* is a popular option.  529 plans are state-sponsored savings plans that allow for tax-free growth and distributions, but it must be used for higher-education expenses. Friends and family can also contribute to the plans.  It is a simple way for family to who may want to give lots of gifts to your little one to have a more substantial impact on their lives.  And we all know a toddler will spend more time playing with a box than the expensive toy that came inside of it. The downside of a 529 plan is that if you use it for anything besides higher education costs, there is a penalty.  You can transfer the account to another family member though if the child doesn’t need it.

Another option for college savings are pre-paid tuition plans.  Parents can lock in tuition at a slightly higher rate than current prices but potentially lower than future costs, however you don’t really know what higher education will look like in the future.  The costs have skyrocketed in recent years, but something will have to change in that model at some point.  There are also Coverdell Education Savings Accounts which you can fund with after-tax dollars and can be used for elementary and secondary education costs.  One risk to be mindful of is that having college savings accounts in the child’s name might hurt their chances for financial aid or need-based scholarships.

Custodial Accounts
A custodial account is a brokerage account in the child’s name.  Two of the most popular ones are UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts.  These are not required to be used for education and have no contribution limits.  But they are subject to the Kiddie tax and will be listed on income tax returns. Also, be aware of potential gift taxes and the current limits.  These types of accounts are irrevocable meaning that you can’t get the money back once you put it in.  This is one of those don’t put yourself at risk for your own needs because you want to help your child scenarios.

Retirement Accounts
Everyone says that earlier is better when saving for retirement so why not start when your child is a teenager.  One way to do that is with a Roth IRA.  Withdrawals can be done tax-free so long as it’s only the contributions that were put in and not earnings. If your child has a summer or part-time job, they can start contributing.

A trust can be a good way to save for your child if you have a considerable sum of money you want to put aside for them.  Make sure to work with an attorney to draft the documents and consult your tax advisor regarding tax considerations including gift tax limitations.  A trust does give more control to parents as to how the money can be used because there is a lot of flexibility in the rules that can be created for a trust.

Financial Literacy
And as frequent readers of this blog will know, financial literacy is so important and you should make sure your children learn those lessons. It is the gift that will keep on giving!  They won’t learn it in school so it’s up to you.  And if you need to brush up on personal finances, there are tons of resources out there and an easy place to start is my Press Page.  There is also The Millennial Money Fix which has a whole chapter about this topic called “Choosing, Affording and Owning College (and Grad School)”.  Start teaching your children about goals and budgeting early.  Those make-believe games of grocery store can turn into a lesson in budgeting and understanding the cost of things, and that knowledge will help them for many years to come.

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This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

*The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.