When you have children, it most often always means making adjustments to your finances. Birthday presents, extracurricular activities, summer camp fees, and medical fees as just a few expenses that prove raising kids can be costly! So if you want to teach your child smart-money-management strategies to help them pay for college or set them up with financial success as adults, it's very important to jump-start savings for kids at a younger age. Beginning with the end in mind, the best way to save money for kids will depend on you goals.
Here are six options to consider:
Create a children's savings account.
Leverage a 529 college savings or prepaid tuition plan.
Use a Roth IRA.
Open a health savings account.
Open a custodial account.
Use tools that teach the value of saving money.
Create a Children's Savings Account
Most banks and credit unions offer children's saving's account, which parents can co-own. These accounts can help children develop the habit of saving, rather than spending, their money.
Leverage a 529 College Savings or Prepaid Tuition Plan Financial experts seem to universally agree that 529 plan is the best way to save money for child college costs. The accounts come with tax benefits, and many plans feature low fees.
There are two types of 529 plans. One is a general college savings plan that allows parents to put money aside into an account that can be used at any qualifying college or private K-12 institution. Some states provide a tax deduction for contributions to their state's 529 plan, and withdrawals used for qualified education expenses are exempt from federal income tax.
Use a Roth IRA
Dipping into your retirement savings for your kids may not sound like a smart plan, but it can be OK so long as it's done with proper planning. Roth IRAs can be a smart choice if you're looking for the best savings plan for child expenses that offers flexibility.
A Roth IRA allows people to save after-tax dollars for retirement. In 2022, workers younger than age 50 can save up to $6000, while those age 50 and older can contribute $7,000. Money withdrawn after age 59½ is tax-free, but withdrawing any gains prior to that age results in a 10% tax penalty.
Roth IRAs offer some flexibility because the principal amount can be taken out at any time without tax or penalty. Depending on your age, you could use some or all of the money placed into a Roth IRA for your child's college education or other expenses. However, if you plan to deplete the account, make sure you have another source of retirement savings, like a 401(k).
Open a Health Savings Account
If you are covered by a high-deductible health insurance plan, a health savings account is another option to consider. “These are generally the best accounts for health care,” Stone says.
Those with a qualified high-deductible family health insurance plan can contribute up to $7,300 in 2022 to a health savings account. This money is tax-deductible, grows tax-free and can be withdrawn tax-free for qualified medical expenses for yourself and your child. At age 65, money can be withdrawn for any reason and only be subject to regular income tax, the same as a traditional 401(k) or IRA.
Open a Custodial Account
A custodial account may be best for those who want to save money for their children but don't want them to have access to the cash until they are adults. The money is held in the child's name, but parents can deposit money and manage the account until the child reaches the age of majority.
Use Tools That Teach the Value of Saving Money
Creating savings for kids is important, but parents shouldn't overlook the value of teaching children to set aside money for themselves. Stone advises parents to review bank statements with their children, talk about why they are saving and look for hands-on tools that can be more effective than simply talking to kids about money.
One way to teach more advanced concepts such as investing is to give children a say in stock purchases. Some investment firms, such as Schwab, allow the sale of fractional shares which makes it possible for even those with limited money to own a part of popular companies such as Disney and Apple.
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