There are several different types of accounts you can set up for your kids, both for the present and for the future. Teach them good money management skills by setting up bank accounts for them now, while also setting up your own accounts for them so they'll be on the right track toward success in the future.
A basic savings account
This one's for them now. If your children get an allowance, opening up a savings account for them is a great way to get them in the habit of saving money. You can never start too young, and habits you develop during childhood will most likely carry over to adulthood. Teach them to pay themselves first, by putting 10 percent of their allowance in their savings account monthly, and the rest can be spent on whatever it is they choose. Consider joining the Savings Safari Club, dedicated to teaching parents and children the importance of saving, while also offering contests and incentives — such as $5 for a good report card — throughout the year.
A custodial account
Custodial accounts, or accounts created for children with you, the guardian, managing them, were created under the Uniform Gifts to Minors Act. It's an easy way to put cash, stocks or bonds in children's names. Once the child reaches a certain age (normally 21), the child can do what he/she wishes with those assets. You can deposit as much money as you like (though anything over $13,000 per year will be subject to the gift tax) as often as you like and take the money out at any time if needed (for the benefit of the child). Another advantage is the first $850 invested each year is tax-free, with the remaining investments being taxed at the child's rate. Keep in mind that custodial accounts are best used for expenses other than college, since there are better plans with better tax benefits out there, such as the 529 plan. One downside is that custodial accounts can greatly affect a student's financial aid eligibility, since the money is considered to be income to the child.
A 529 plan
A 529 plan allows you to both save and earn interest on money for your child's college education. There are huge benefits to a 529 plan:
- The money you invest is tax-deferred, and your children's withdrawals are generally tax-free.
- The interest you earn is like that of owning mutual funds and dependent upon the market, with the long-term goal being to earn significantly more than you would if you invested the money in a regular savings account.
- No maintenance is required — the plan manages the money for you.
- You can contribute as much per year as you choose.
With college tuition prices only increasing, it's extremely important to start saving and preparing when your kids are young. A 529 plan will ensure that your money will not only be saved, but it will be invested and therefore, grow. Teaching your children good financial management skills and helping them save for the future is one of the best things you can do for them as a parent.
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