“How do you save money for your kids?” I hear this question a lot!
Most parents today think the main thing they should be saving money for, regarding their kids, is college. College tuition is out of line at many schools and student loan debt is a plague on today’s society.
Millennial and Gen-X parents today are often strapped with student debt of their own and don’t want that for their kids.
So what’s the best way to save money for your kids? I might have some different insights than some parents, but here’s what we do for our 2 mini-Beans.
Save Money for Your Kids in a 529 Account
A 529 plan is a state-sponsored investment account specifically for educational purposes. It’s like a 401k for college.
Parents, grandparents, and anyone with the account info can put after-tax money into the account in the name of a child. These funds are then invested, usually, in index funds or target date index funds for the year, the child will go to college.
When the monies are withdrawn and used for education expenses, the growth from the investments is not taxed. They get to grow tax-free!
Each state has its own programs. Some states even offer annual tax deductions for putting money into a 529, but not all do.
You are actually allowed to shop around for a 529 plan. You don’t have to use the plans offered by your state. But if your state does offer a tax advantage, it might make sense to use your own state’s. (Compare 529 Plans)
Why 529 Plans are Good
529 plans have gotten much better in recent years. Before, 529 plans could only be used for college tuition and college fees like books and lab fees.
In recent years, 529 plans have allowed trade schools and elementary through high school as well.
It also can be used for room and board expenses and some technology expenses. (What 529 Plans Cover)
As of 2019, students can even use up to $10,000 of their 529 plan to pay off old student loans.
And if the child the fund is designated for decides they don’t want to attend college or trade school, the money can be transferred to any other related family member: siblings, their children, even back to the parents
Why 529 Plans are Not 100% Awesome
Savings in a 529 Plan are only for education. If your child decides they don’t want to go to college but want to use the money for a downpayment on their first house, you will lose any tax benefits you had on that money.
If you pull money from a 529 plan out for non-education purchases, you will have to pay income taxes on the growth of the account PLUS a 10% penalty. (Non-Qualified 529 Distributions)
529 funds can also be used against students when qualifying for financial aid at certain colleges.
Save Money For Your Kids in a Savings Account
One of the most obvious ways to save money for your kids is to open a high-yield savings account at your local bank, credit union, or my favorite, online banks like Ally.
Why Savings Accounts are Good
High-yield savings accounts offer a small amount of interest to help your savings grow over the years. It also keeps the money safe and usable without the fear of loss.
You can create a joint/custodial account with your kids to save money for them and encourage them to save their own money as well. When they become 18, they can take over the account.
Or if you want to stay in full control of the money, you can open an account in your name only and just designate the account for your child. (I love the account nickname feature on Ally)
I make sure to put the child as the beneficiary on the account in case something happens to us before we can give them the money.
Why Savings Accounts are Not 100% Awesome
The small amount of interest savings accounts offer is not enough to keep up with inflation, so the actual value of each dollar is less by the time the child is an adult and needs to use the money.
Save Money for Your Kids in a Custodial Account
A custodial account is an investment brokerage account for your child that you control while they are a minor. It can be invested in the market like any other taxable brokerage account in index funds or individual stocks or bonds.
It is a great way to get your child involved in investing as they get older and help your money keep up with inflation and more.
Why Custodial Accounts are Good
Custodial accounts allow you to invest your savings and grow over time. (Super Simple Investing)
Invested simply, they can become a great way to build money as your child grows. Compound interest over time is one of the wonders of the world!
Why Custodial Accounts are Not 100% Awesome
When a child on a custodial account becomes of age in their state, often 18, the account is no longer custodial, it becomes 100% theirs. They can do whatever they want with that money, the parent no longer has a say.
You, as the parent, may have spent the last 18 years putting money away for their college, wedding, or first home downpayment.
They, as 18-year-olds with a new bucket of money available to them, might decide to cash the whole thing out and go buy a new car or awesome video gaming setup. And you can’t do anything about it. It’s theirs. (Teach Your Kids About Money)
Another negative is that if your child decides to go to college and apply for financial aid, custodial funds, that now belong to them at 18, can mess up their offers. The assets of the student are counted more strongly against financial aid than the assets of the parents.
Saving for Your Kids in a Trust
“A trust is a legal vehicle that allows a third party, a trustee, to hold and direct assets in a trust fund on behalf of a beneficiary.” (Bankrate)
Why Trusts are Good
A trust allows you to put monies away for your kids with specific directions on how and when to be invested and used. A trustee (the person who is in charge of running the trust if you pass before distribution. Which is often a lawyer, banker, trusted friend, or adult family member) will follow the directions and distribute the funds to your child at the designated times.
Funds in a trust do not have to go through probate in the event you die.
Why Trusts are Not 100% Awesome
Trusts can be expensive to set up and maintain. You have to set them up with a lawyer and file all sorts of things to make them legal.
Trusts can be great if you have a lot of assets that need to be protected from spend-happy young adults. But they are not necessary for most people who are just trying to ensure their kids have a good start to their adulthood.
How We Save Money for Our Kids
As we have learned more about personal finance over the years since having our first child 11 years ago, we have adjusted how we save for our kids a few times.
Savings Accounts
When B.B. Bean (Baby Boy Bean, my 11-year-old son, he chose his screen name) was born, we followed the wisdom of our parents and opened him a savings account and bought some regular ol’ government bonds.
These don’t earn much, but they’re safe and there for their future.
529 Accounts
When I was pregnant with Jelly Bean (my 9-year-old daughter, who also chose her screen name), I started learning more about personal finance. We opened 529 accounts for them and started saving a little bit each month for college.
BB Bean insists he wants nothing to do with college and Jelly Bean is already planning to apply for scholarships and work her way through college. So we put minimal contributions into their 529 accounts each month. (Pay for College, Debt Free)
If they use them, great. If not, it can become a college fund for their own kids down the line.
Brokerage Accounts
As I began researching more about investments and returns, we decided to open regular brokerage accounts, in our names, designated for each kid.
We simply opened basic brokerage accounts with Vanguard and invested them in VTSAX Total Market Index Funds.
This way, their investments can grow with the market over the years and can be used for anything. AND we are entirely in control of the money no matter what age the kids are. We just designated each child as the beneficiary of their specific account in case anything should happen to us.
We plan to use these funds for whatever is needed when the kids get older: If they go to college, great. Want to buy a house? We can help. Would just love some cash to start their own investment account? AWESOME, here you go!
And if in the unlikely event they become crackheads and move to some remote island, never contacting us again, the money is ours to spend however we choose.
Roth IRAs
Roth IRAs are one of my favorite forms of investing. Mr. Bean and I both have one and we have pounded it into our kids’ heads about how important they are. (Roth vs Traditional)
When our kids start working as teens, they are both expected to put a portion of every check into their Roth IRAs. Roths are a perfect way to begin investing for their own futures. And retirement funds don’t count towards College Financial Aid. (Investments counted towards FAFSA)
But because Roths are aftertax, you are allowed to withdraw the contribution amounts. These can be used for college expenses, if they choose, and leave the growth to continue growing.
Wrap-Up
There are many ways to save money for your kiddos!
Depending on the purpose of the money and how you want to control it or not will determine the best form of savings for your family.
How do you save money for your kids? Do you have any tips or tricks? Leave a comment below and join the conversation!