I just had a baby. How can I start saving for their future?

I just had a baby. How can I start saving for their future?

March 19, 2024

Question: 

I just had a baby. How can I start saving for their future?


Answer: 

A new addition to the family can be one of the most joyous moments of your life. New memories, excitement and a thirst to always do the right thing by your child are common feelings for any parent.

With that in mind, giving your child a head start on their financial future is a gift that can pay major dividends for you and them for years to come.

Did you know that if you invest $10,000 into the stock market, with an average annual return of 10% over a 30-year time frame, that initial $10,000 investment would be worth over $174,000 in those 30 years?

Having this type of long-term view for your child’s financial well-being can be key to setting them up for success!

Below, we discuss some of the ways that you can start savings for your child. Whether it be for education or to kickstart their adult life, there are a few different options you can utilize for their benefit.

 

#1 Open up a Custodial Account

Custodial accounts are some of the most popular investment vehicles for minors. This account will allow you to name your child as the account beneficiary while you remain the custodian of it until they reach the age of majority.

The age of majority varies by state to state and is generally either 18 or 21.

At that age the account is then transferred to the child’s name and can be utilized to help them start their adult journey.

 

Two types of custodial accounts:

There are two different types of custodial accounts that are structured to tailor to specific investment needs.

 

UTMA: Uniform Transfer to Minor Act Accounts

These accounts are set up to hold a variety of investments. These investments can include assets such as stocks or bonds but can also hold more illiquid forms of assets such as Real Estate or Art.

UGMA: Uniform Gift to Minor Act Accounts

If you are strictly setting up an investment account for your child, you will most likely do it through a UGMA account. These accounts are more limited in the scope of assets that can be held within them which include stocks, bonds ETFs and Mutual Funds.

The Facts:

  • This account can be opened by anyone who is over the age of majority for anyone under the age of majority.
  • The custodian of the account has full authority over the account until the beneficiary reaches the age of majority.
  • There are no contribution limits or income restrictions to these accounts, however there are also no tax benefits to depositing money in them.

 

#2 Open up a 529 Plan Account

A 529 Account is a state sponsored education savings plan designed to help families set aside and invest funds for future college expenses. These accounts allow you to invest money which will hopefully help the account value grow over time.

The earnings in these accounts grow tax-deferred and withdrawals for qualified expenses are tax free.

Qualified Expenses for 529 Accounts include but are not limited to:

  • Study Material such as books
  • College Tuition
  • School Supplies
  • Room and Board

Outside of the benefits that this plan will have for your child’s future education costs, there may also be some benefits for you as well. Depending on the State you live in, your contributions to this account may be tax-deductible.

Another key difference between a 529 Account and a custodial account is that the creator of the account may switch beneficiaries if necessary.

For example, if you have a 529 Account set up for one of your children but not the other and the child in which the account was set up for decides not to go to college, you may change beneficiaries to your other child who might be pursuing a college education.

The Facts:

  • Every state’s 529 plan differs so be sure to understand the differences depending on where you live.
  • There are no income restrictions to these accounts and no uniform set contribution limit as well.
  • There is also no age limit for the beneficiary of the account.
  • New in 2024, beneficiaries of a 529 Account are able to transfer up to $35,000 of their account value to a Roth IRA which can be used for their retirement. 

#3 Open up a Coverdell Account

A Coverdell Account is a tax-preferred investment account, sponsored by the IRS, which is designed to help ease the burden of education costs. These accounts cover a wide array of education costs which can include those for elementary or secondary school.

Though these accounts are similar in nature to 529 Accounts, there are a few differences that you should be aware of.

For one, the beneficiary must be under the age of 18 when the account is established and all funds that aren’t used by the time they reach the age of 30 will be distributed to them.

A second difference is that there is a set contribution limit for Coverdell accounts which is $2,000 per year, per beneficiary.

Another difference is that there are income restrictions for these accounts. Joint filers whose modified adjusted gross income (MAGI) is over $220,000 or single filers whose MAGI is over $110,000 are ineligible to make contributions to Coverdell accounts.

 Finally, contributions to a Coverdell account are not tax deductible though they may be in a 529 plan.

 

The Last Word:

Saving for your child’s future no matter which way, is always a step in the right direction for both you and them. While these gifts may not be the new fancy toy everyone is talking about, helping your child get off on the right foot in their adulthood can play a key factor in their confidence.

Everyone’s situation is different, so we always advise our clients to lay out all of their wishes before we help them choose the best option for them when it comes to saving for their child.

We’d be happy to discuss this with you as well to help you make a decision that will be appreciated by you and your family for years to come.

Do you have questions you would like us to discuss here? Click this link to let us know and we hope you found this helpful!