Helping to pay for a wedding, college and even a down payment on a home are all things many parents would like to be able to do for their children. One way to accomplish this goal is to start investing on their behalf when your children are young. While you should make sure you have some savings yourself and you are not struggling with debt before you begin, you do not have to be wealthy to establish a good financial future for your children.
Planning for College
College costs are a big concern for many parents. There are several ways to approach this. One option is an Educational Savings Account or Coverdell Savings Account, but there are limits on how much you can contribute. A 529 plan does not have these limits and allows investments to grow tax-free. Some parents prefer to use a traditional or Roth IRA, which allows distributions if they go toward qualified educational expenses.
Even with these savings, it may be necessary to take out student loans to pay for college. The Free Application for Federal Student Aid, or FAFSA, can be completed in your child’s senior year of high school and helps in locating both loans and grants from the federal government. You can also take out private student loans if your child does not qualify for federal loans or additional loans are needed.
Their Own Investment Account
Under the Uniform Gifts to Minors Act or the Uniform Transfers to Minor Act, you can open a custodial brokerage account on your child’s behalf. This is an excellent way to put away money that your children can use when they are adults. While it will initially be in your name, it will pass the investments to your child at the age of either 18 or 21 depending on what state you live in. These accounts are taxed according to the child’s tax bracket and not yours.
When your child is a teenager and gets a part-time job, you can help in opening a Roth IRA. Like the money in a 529, this grows tax-free. The advantage of a Roth IRA is that the money does not have to be used only for retirement. As adults, your children can make withdrawals for college costs or for a down payment on a home within certain limitations.
Talk About Money
Setting your children up for financial success when they are young is important, but educating them about money is equally important. You aren’t doing your child any favours if you don’t teach them about budgeting, saving and investing and hand them accounts worth thousands of dollars when they turn 18 or 21. From a young age, children can be encouraged to save and spend responsibly. It’s valuable to teach them to balance frugality with rewards. As they get older, they can participate in making choices about the investments as well. You might want to consider working out a deal with your older children in which you match any contributions they make from money they earn.