Joy & Mike Gymsplain Investing for A Child's Future
When it comes to saving for your child’s future, there are a number of options available. On this episode of Financially Naked: Stories from The Financial Gym, our Certified Financial Trainers, Joy Liu and Mike Poulin, are discussing the different types of investment accounts you can use to save for a child’s future, considerations for each, and how to choose which is the best for you!
Podcast Notes
Saving for college tends to be the default goal for many parents, but there are other options. Step number one is to determine the goal for this investment account.
Don’t let decision fatigue keep you from taking action. No matter which option you choose, the most important thing is to get into the habit of saving. These funds are fairly flexible, and there’s time to adjust, especially if you start saving when the kids are young.
For education:
529 plans are great for education because they are tax-advantaged, and while originally designed for college only, have expanded to cover more types of learning. You can use a 529 plan for college tuition, K-12 schooling, and certain apprenticeship programs.
Contributions in the account grow tax-free and as long as the money is used for eligible education expenses, it isn’t taxed upon withdrawal.
Each state has its own program, and some provide additional tax benefits as incentives for folks to invest in these types of accounts.
Most 529 accounts make it very seamless for other folks to get involved. Friends and family can contribute to these accounts for holidays, allowing everyone to invest and build wealth together.
For Other Goals:
Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA)
These are custodial accounts in your name, but your child’s social security number. When withdrawals are made from the account, it is taxed at the child’s rate. These funds aren’t limited to education expenses.
Depending on the plan, the account is transferred to the child once they reach a certain age, with no tax liability on that transfer. They can use the money however they want, whether that is for school, to start a business, to purchase a home, a wedding, or continue to invest.
UTMA plans are similar to a trust, where other assets can be included, and are more simple to set up than a traditional trust.
Considerations:
With the custodial account options, these accounts can directly impact the amount of aid and federal loans a student qualifies for. The 529 plans have a much smaller impact when filling out the FAFSA application.
If you’re at least 50% sure the funds will likely be used for education, the 529 is generally the best option.
Laws can and will change. We don’t know what the higher education landscape will look like 10-18 years from now. There may be a shift in the price of education and the structure of the federal loan program.
Don’t let the limitations of either of these accounts stop you from getting started. The most important thing is to start saving and make it a consistent habit.
Nothing is permanent, and the funds can always be rolled into a different account in the future. Make a plan, and get started!
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