One day soon, I’m going to have a baby in the house. Like many millennial parents, I’m prepared for all kinds of things: feeding schedules, changing diapers, bonding time. But one of the things they don’t often tell you about in new parenting classes is the financial aspect, especially long term thinking. The closest most people who help prepare parents get to discussing financial realities is touching on how expensive kids can be. While budgeting and frugality are important for new parents – especially those who aren’t made of money – they only focus on the short term.
Kids grow up. One day, you’ll likely want your child or children to go to college, or to buy a house of their own. Most kids won’t be able to afford these lifestyle hurdles without some help from you. And while it’s totally possible to invest and save in such a way that you can just write a check when the day comes, it’s not the most efficient way to help prepare for your child’s distant financial future. In fact, large savings that you’ve put together in the name of your child could actually cut down on the financial aid they receive when it comes time for college. Here are some better ways to give your new child a financial boost.
Roth IRA - This is the most obvious answer, as it’s an investment plan that’s probably already familiar to you. Typically used as a retirement plan, this tax-sheltered account allows investments to be allocated for children as well, and you can even select at what age they will take over full control of the account. The downside of this is that you won’t be able to put this account in your child’s name till they are of age, meaning that this won’t be a meaningful way to stock up on college funds. However, it will be a nice little windfall for your kids much later in life. For college funds, read on.
College Savings Plans (529) - The 529 College Savings Plan is very similar to the Roth IRA, in that investment monies are contributed tax free. They can even be spent tax free, so long as they are spent on college or university expenses. This is an account that’s tailor-made for parents with college-bound children. The parent owns the account and the money therein, and can select a beneficiary. The beneficiary can only spend the money on education-related expenses. If a child decides not to pursue higher education, the funds can be given to a different beneficiary. Some restrictions apply, but it’s a pretty simple deal, which more parents should take advantage of, even before their kids are born.
UTMA and UGMA Accounts - Like the previous two accounts, this is an investment account with tax protection. But unlike the others, taxes resume beyond a certain level of earnings, and there is no allocation requirement for education. When your child becomes of age, he or she will have most of the control of the account, meaning that the money can be spent in whatever way the child chooses.
If you start one of these accounts when your child is small, it’s likely that they will have a huge head start when they have to make big financial moves in adulthood. Maybe you benefited from such a decision that your own parents made. Whatever the case, this can be a very wise move for new parents.
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