A kids’ savings account can help your children achieve future financial goals, like going to college, purchasing a car, or paying for a wedding or trip. According to Forbes, the four-year cost of sending a kid to an in-state public university was $18,550 in 2020. If your child dreams of an Ivy League education or escaping to the University of Hawaii, the expenses only go up. To pay for college, you may want to start saving and investing instead of relying on financial aid or scholarships to cover the costs. With some knowledge, you can make smart choices to maximize your savings for your child’s education. Here’s everything you need to know to start a kids’ savings account.
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Why Do You Need A Kids’ Savings Account?
You need a kids’ savings account to help your child achieve their goals and reach their potential as adults. In many cases, you can find a savings account that allows you to make automatic deposits, so you can save without thinking about it.
When you have young children, starting a savings account can make a real difference to their future. Of course, before you start money aside each week or monthly, you need to know that there are real benefits for you and your family.
Here’s a look at some of the best benefits of opening a kid’s savings account:
1. Tax Benefits of Kids’ Savings Account
Depending on the type of savings account you select, you may find some excellent tax benefits. Sometimes, the funds you place in a kids’ savings account aren’t taxed when you deposit them. For example, if you make $50,000 a year and you deposit $1,000 each year, your taxable income before other deductions will drop to $49,000.
Other accounts help you defer taxes when you deposit the funds and don’t charge you federal taxes when you use the money for your child’s education later. This means it’s money that you never pay taxes on.
2. Financial Education at a Young Age for Children
You want your children to learn the value of money and how to make intelligent choices. While you might believe that your children do what you say, they do what they see you doing.
Saving now for your child’s future is a great way to start their financial education. Depending on your child’s age, you can encourage them to help you select the correct type of savings account and contribute a little to it.
3. Streamline Your Savings for Future Education Needs
Your child needs a college education to succeed in the modern world, but it’s expensive. By opening a savings account now, you can streamline your savings for your kid’s future educational needs. There are many savings accounts out there that cater to parents looking to maximize their savings efforts for their children.
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Choose the Right Kids’ Saving Account for You
The best option for one person isn’t necessarily the right one for you. You and your family have unique needs and income availability. You might be willing to take more risks than someone, or you may want to play it safe and earn fundamental interest. Another factor is the money you save and the goals you want to achieve. With so many options available for a kid’s savings account, you need to learn more about them to make an informed decision.
1. Traditional Savings Account
A traditional savings account is almost certainly your safest bet. You can secure a traditional savings account at nearly any bank or credit union in your local area or secure one online. The biggest disadvantage to a traditional savings account is that you don’t earn much interest from this type of account, and you must pay taxes on it. Interest earned on this type of account is influenced by the interest rates set by the Federal Reserve, which lowers it when they want people to spend and raise it when the economy is good.
2. UGMA/UTMA Account
These accounts were created by Congressional legislation, allowing you to save money for your children and maintain control of it until your child becomes a legal adult. Once your child becomes an adult, the funds in the account and control over it transfer to them. You would’ve needed a trust or face tax consequences to accomplish this in the past.
3. General Investment Account
A general investment count is like the one you would open for yourself. You’re responsible for paying the taxes on the income you place in the account and any profits you make. Also, you’ll need to hire a professional financial advisor to make your investments. These fees can eat into any profit that you realize on these accounts.
4. Education Savings Account
The Coverdell education savings account the government created to help parents save for college. Your child must be 18 years old or younger, and the funds must be used by the time the child reaches the age of 30. These are tax-deferred accounts, so you don’t pay taxes until the funds are spent on education. Recent changes to the law allow you to spend some funds on eligible private schools for grades K-12.
3. 529 Savings Account
A 529 savings account is named after the tax code that created it. This plan allows you to save for your child’s education and doesn’t have a maximum amount to add each year. It also defers taxes, and you won’t pay federal taxes when you use the funds for education. However, the individual states are responsible for the plans, and not all states offer them.
Choosing the right kids’ savings account for your children is essential for success. Many options are available, and selecting the right one can help your child become a successful adult.