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How to Save Money for Your Kids
By SmartAsset Team,
11 hours ago
There are many reasons to save money for your kids, whether you're trying to pay for their education, help them buy a first home or simply create a financial cushion for their future. You can do this in different ways, depending on your financial situation, needs and goals. Starting early, however, can give your children a strong financial head start. Here are six common ways to help you save for their future.
A high-yield savings account or money market account is a straightforward and flexible way to start saving for your child's future. These accounts offer higher interest rates compared to regular savings accounts, allowing your money to grow faster while still maintaining easy access to the funds. This option is ideal for parents who want to save for short-term goals or who prefer the security of FDIC-insured accounts . With no long-term commitment, you can withdraw funds as needed.
Certificates of Deposit (CD)
Certificates of deposit (CDs) are another low-risk savings option that can help you grow your child's savings over time. CDs typically offer higher interest rates than savings accounts but require you to lock in your money for a set period, ranging from a few months to several years. This option is best for parents who have a specific timeline for when they will need the funds, such as when their child turns 18. CDs are also FDIC-insured, providing peace of mind while your savings grow at a fixed rate.
UTMA or UGMA Account
The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts are custodial accounts that allow you to transfer assets to your child without setting up a formal trust. These accounts can hold a variety of assets, including cash, stocks and bonds , which can be used for any purpose once the child reaches the age of majority (usually 18 or 21, depending on the state). UTMA and UGMA accounts offer flexibility and control, allowing parents to save for a wide range of future expenses while taking advantage of potential tax benefits.
ABLE Account
An ABLE (Achieving a Better Life Experience) account is specifically designed for individuals with disabilities and their families. These tax-advantaged savings accounts can be used to cover qualified disability expenses, such as education, housing and healthcare, without affecting eligibility for government benefits like Medicaid or supplemental security income (SSI) . ABLE accounts are a valuable tool for parents who want to ensure their child has financial resources while maintaining access to crucial support services.
529 Plan
A 529 plan is one of the most popular ways to save for your child's education. These tax-advantaged accounts are specifically designed to cover qualified educational expenses, including tuition, room and board and textbooks. Contributions to a 529 plan grow tax-free and withdrawals are also tax-free when used for qualified education expenses . With options for both college and K-12 education, 529 plans offer flexibility and significant tax benefits, making them an excellent choice for parents focused on funding their child's education.
Trust
Setting up a trust can help you manage and protect your child's inheritance. Trusts allow you to specify how and when the money should be distributed to your child, giving you control over the assets even after your child reaches adulthood. There are various types of trusts , including revocable and irrevocable trusts, each with different benefits and implications for taxes and asset protection. Trusts are particularly useful for parents who want to set specific terms for how the funds should be used, such as for education or housing.
How Much Should I Save for My Kids?
Determining how much to save for your kids depends on several factors, including your financial goals, your current financial situation and your child's future needs. For example, if your goal is to fund your child's college education, you will need to consider the rising cost of tuition and other related expenses. On the other hand, if you are saving for a down payment on their first home, your savings target may be different.
It is also important to strike a balance between saving for your child and ensuring that you are meeting your own financial goals, such as retirement savings . Starting with a clear understanding of your priorities and making regular contributions, no matter how small, can help you build a substantial fund over time. Using tools like savings calculators or consulting with a financial advisor can also provide guidance on how much to save based on your specific situation.
When Do I Hand Over the Savings Account?
Deciding when to hand over your child's savings account is a significant milestone, and it often depends on their readiness and your financial goals. Many parents choose to transfer control of the account when their child reaches adulthood, typically at age 18 or 21, depending on the type of account. However, the timing can also be adjusted based on your child's maturity level, financial acumen and their specific goals, such as attending college or starting a business.
It's also important to have open discussions with your child about financial responsibility and their plans for the money. As your child grows and their goals evolve, you may need to revisit your savings strategy and make adjustments as needed. Handing over a savings account can be a great opportunity to teach your child about money management, helping them make informed decisions about their financial future.
Bottom Line
Saving money for your kids is a thoughtful way to invest in their future. Choosing the best way to save money for kids requires careful planning and consideration, whether you are saving for education, a first home or simply giving them a financial head start. By exploring different savings options and personalizing your approach to your child's needs, you can build a solid foundation that will support them as they embark on their own financial journey.
Financial Planning Tips
If you want to create a financial plan, an advisor can work with you to determine which strategies are a good fit for your needs and goals. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
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