Child Savings Plan – What is the Best Investment Plan for Child
May 1, 2021
Most parents are anxious about taking care of their children until they’re adults, but they can start sharing this duty by gradually incorporating their children into their money management decisions.
Not only is this a great way for their kids to start developing their financial education, but they’ll also start to understand the importance of money in their lives.
So, you might be asking: what is the best child savings plan to provide a wealthy financial future for my children? In this article, we’re going to go over four things that you can do to set your child savings plan up to be successful.
Address Your Financial Needs Now
It can never be too early for parents to begin including their kids in their money decisions. Several investing tools can be used to jump-start their child savings plan.
If you’re going to open a savings account for your child, you can create a custodial account where you, the parent, are the custodian of the account and your child is the beneficiary.
So, you would control the account until your child reaches the age of 18 or 21, depending on your state’s laws.
A custodial savings account can be set up at an investment firm or the bank. In a custodial account, you and your child can pick if you invest in exchange-traded funds, mutual funds, individual stocks, and other type of investment.
While the adult will open the account on behalf of the child, the legal holder of the assets is the child. Making the investment decisions as a team isn’t only a valuable learning experience, but it can also help your child take on early ownership of the account.
The custodial account is beneficial to parents because the investment income from the account in the form of dividends, earnings, or interest is taxed at the child’s tax rate – this is lower than the parents’ rate at.
The tax rate on the first $1,100 can be as low as 0 percent, and unearned income more than $2,200 can be subject to tax using brackets and rates for trusts and estates.
A good rule of thumb to use is this: if you require the money in five years or less, then it should be put into a CD (certificates of deposit), savings, or money market account, or somewhere that it’ll be liquid.
If you need the money in less time, there’s a possibility that you could invest the money and not get back what you originally put in.
If your child receives monetary gifts from family members during the year, you can decide to set that money aside to be used for their future. If your child is young, they won’t really need this money until they’re 18, so it doesn’t need to be in a liquid position. Simply put it in your kids savings account.
However, if your child is 14 or older and you want to save their monetary gifts to add to a college savings plan, this money shouldn’t be invested in bonds or stocks. Rather, you should put the money into more liquid positions.
How You Can Invest in Your Child’s Future
For those parents searching to fund their child’s education, a 529 tax-advantaged account is a great savings vehicle for K-12 tuition or college tuition.
A qualified tuition plan, or a 529 savings plan, is a tax-advantaged savings account used for expenses related to education. Unlike other tax-advantaged savings accounts, there is no income limit for contributions for a 529 plan.
Any withdrawals from a 529 savings plan used to pay qualified education expenses aren’t subject to federal income tax on capital gains from investments.
But 529 funds used for noneducational expenses are taxed by federal and state governments and have a 10 percent federal tax penalty on the earnings. The withdrawal can also be subject to state income taxes.
A 529 savings plan is much more flexible than a regular savings account. For instance, if the original beneficiary decides they don’t want to attend a vocational or trade school, college, or another postsecondary educational program, the account can be transferred to another child.
Grow Your Child’s Earnings Using a Roth IRA Account
Parents that are saving up for their child’s future for non-education purposes can also consider a Roth IRA account. This individual retirement account gives tax advantages for retirement savings.
The money in a Roth IRA grows with earnings and contributions free from taxes. The funds in a Roth IRA can be withdrawn without any tax penalties after the age of 59 ½.
Many experts recommend that you start a Roth IRA account for your child as early as you can. Your child qualifies for a Roth IRA once they have a job and are earning annual income.
Roth IRA accounts can show your children the true value of compounding interest. Let’s say that your teen earns about $4,000 in one year.
If they put $2,000 into a Roth IRA account, and the account earns an average return of 5 percent with 50 years until retirement, the account will be worth almost $23,000 when they’re finally ready to retire.
Teach Your Child How to Invest Themselves
Beginning at a young age, kids need to be taught how to save their money and that people can’t become rich by living beyond their means, regardless of how much they make.
If you want to start teaching your children anything, you should teach them how to save and budget their money.
If you aren’t sure about finances or budgeting, do some research to become well-versed in the subject. You must instill money management skills into your children when they’re young, so they grow to be financially responsible adults.