If you want to save money for your children but aren’t sure where to start, keep reading to identify the best way to save money for kids. The first step is to assess your spending plan or budget to determine how much you can contribute to the cause each month. Next, decide which accounts are best to house your hard-earned money.
Do you want a traditional savings account, custodial account, trust or investment account to make your money work harder for you? Or maybe you’re completely overwhelmed and aren’t sure which are most ideal for your financial situation and savings goals.
Don’t fret. In this guide, you’ll discover the best way to save money for kids.
Investment Account for Kids
5 Best Ways to Save Money for Your Kids
1. Custodial Brokerage Accounts
Custodial brokerage accounts belong to the child but are managed by the parent until the child is 18 years old or reaches the age of majority in their respective state. There are two options to choose from:
- Uniform Gift to Minors Act (UGMA) account: can consist of cash, annuities and securities
- Uniform Transfers to Minors Act (UTMA) account: can consist of almost any type of asset
You can contribute up to $30,000 annually without being subject to gift tax, and there’s no overall contribution limit. Any earnings on the assets subject you to a bill for kiddie tax. The upside is your child can use the funds however they see fit.
2. 529 College Savings Plans
A 529 college savings plan lets you save for future higher education expenses and enjoy tax benefits. Here are your choices:
- Prepaid tuition plan: You can use this account to save for tuition, but the major perk is you’ll lock in today’s rate for the future when your child attends college.
- Education savings plan: You can use this account to save for several types of college-related expenses.
Annual contributions are limited to $30,000 without paying gift tax. However, earnings are not subject to taxation if you apply them to qualifying education expenses.
Suppose your child decided not to attend college. The account can be transferred to a relative and retain the tax benefits. But if the funds aren’t used for qualifying education expenses, any gains on the contributions are assessed federal income tax.
3. Savings Account for Kids
These savings accounts for kids are available at most credit unions, banks and online financial institutions. You likely won’t earn a significant return on your money. Still, they’re an effective tool to teach your children the basics of money management.
It’s easy to open these accounts, and you’ll be noted as a co-owner with your child. Consider making recurring deposits or encouraging your child to do so when they receive cash to grow the balance. Also, keep tabs on how the money is spent and suggest how it can be managed more effectively.
Investment Account for Kids
4. Roth IRA Accounts
Custodial Roth IRAs permit up to $6,000 in annual, post-tax contribution. This means you won’t be on the hook for federal income tax when you start making withdrawals at retirement age (or as early as 59 ½).
While pooling cash in a Roth IRA may not seem like a sensible idea to save money for your children, consider this:
- You won’t incur tax penalties for early withdrawals (up to the amount you contribute)
- The funds can be used for your child’s college education without tax consequences.
Note that there are income limitations for Roth IRA accounts. If you’re a high-income earner, it may not be a suitable option for you.
5. Trust Funds
Consider a trust fund if you have a sizable amount of cash you’d like to set aside for your child. It’s a valuable tool that allows you to dictate how the funds can be used. Plus, it can possibly shield the funds from future claims against your children brought forth by creditors.
Contact an attorney to learn more about how trust funds work and the assortment of benefits they offer.
Start Saving for Your Child’s Future Today
There’s no shortage of options to start saving for your child’s future. And if you’ve decided a custodial brokerage account is best, UNest is a platform worth considering.
It simplifies the investing process from start to finish with its user-friendly platform and seamless account setup process. Plus, you can manage your account directly from the mobile app if you have an Android or iOS device.
You can choose from a regular or family plan for only $2.99 or $5.98 per month/respectively. Both let you choose from five investment options (some are age-based), and you can invite family and friends to contribute free of charge. There’s also a savings calculator you can use to identify your goals more easily. Plus, you’ll earn UNest Rewards when shopping online with your favorite brands or a $15 reward when you refer a friend to grow the balance of your child’s custodial account even faster.
Here’s how it works:
- Step 1: Download the UNest app on your mobile device.
- Step 2: Use the savings calculator to determine how much to contribute monthly to meet your goals.
- Step 3: Start making monthly or bi-monthly contributions. (Quick note: this is done each month electronically using the banking information provided when you sign up).
- Step 4: Invite family and friends to contribute.
- Step 5: Continue making contributions until you reach the finish line.
The funds in your UNest account can be used to pay for college or significant future life events, like your child’s wedding. Or they can cover the down payment on your child’s first home, car or however else you see fit.
Ready to get started? It’s only $25 to move forward, and you can set up an account for your child in minutes on the mobile app.