I often get asked, “What is the best way to save for my kids?” Here are a few suggestions to consider when setting up savings for children or grandchildren:
Start with a bank account
A traditional bank savings account or money market is a good place to start. Many banks and credit unions offer savings accounts specifically for children. Often, these accounts will come with a slightly higher interest rate. I recommend bank savings because it is a great way to begin teaching kids about the value of money. They have a place to deposit change collected or gifts of checks and cash and they can see the value grow.
The downside of savings accounts is the low interest earned. Right now, savings rates are extremely low, so any money left in savings accounts for a long period of time will begin to lose money to inflation. It is nice to have a savings account but for long term goals or larger amounts of money, it is important to consider investing for a higher return.
As kids move into their teenage years, it is a good idea to consider spending accounts. Again, this becomes a teachable moment. With our move to cashless transactions, it is getting more difficult to hand a teen a $20 bill for them to make a purchase. Many banks allow you to set up checking accounts for minors that are owned by the parent. The accounts give the teen a debit card to use for transactions and begin learning about cash flow.
Recently, I came across a Fintech startup, called Step that is a FDIC insured bank account with a Visa card that is offered specifically to teens as a way to help them spend securely and start building positive credit. I have not used the platform and I have no affiliation with the company, but I saw this as an example of how technology is making it easier for us to teach our kids about good money habits.
Investing for college
529 college savings plans have become a great solution for saving for education expenses. A 529 account is set up and owned by a parent or grandparent. When setting up the account, the owner will need to choose a beneficiary, which is the student that the money is earmarked for. Money contributed to the account is invested in mutual funds and the owner will have a choice between an age-based portfolio which automatically adjusts the risk of the investment allocation as the student gets older or a custom portfolio that allows the owner to choose their own investment allocation.
529 accounts provide tax-deferral which means that the owner does not pay taxes on interest earned or capital gains as they are earned. Distributions from the account are tax-free for qualified education expenses. Funds can be used for universities and colleges, accredited vocational and trade schools and now even K-12 tuition with some limitations.
For kids that choose not to attend college, the money can be switched to a different beneficiary or the money can be withdrawn for other purposes. However, withdrawals for non-education expenses can be subject to taxes and penalty.
If you are starting early and have time to invest, the 529 plan is a great way to invest money for future educational expenses. It also provides an easy way for grandparents or other family members to gift money or crowdfund together.
For other goals outside of education, I often recommend setting up an investment account that provides flexibility. Many families want to save for weddings, home purchases or other major expenses or some just want to have a fund to fall back on.
Options for investing include setting up a brokerage account which allows the owner to choose from securities like stocks, bonds, mutual funds, etc. to invest money. Some people like to set up direct accounts with a mutual fund. When setting up these types of accounts it is important to consider the risks and fees involved and make sure that the investments are appropriate for the goals. Most brokerage accounts offer no-fee trading and fractional shares in stocks. This has made it easier to invest smaller amounts of money and let the accounts grow over time.
Investment accounts can be another great way to teach kids good financial concepts. With a brokerage account kids can learn about stocks and they can track their ownership in some of their favorite companies. They can also learn the tradeoff of spending money versus investing as they earn money over time.
Ownership of the account depends on the intention. If the parent or grandparent wants to maintain control, the account will need to be in the parent or grandparent’s name or a trust. While the owner maintains control of the account, they can provide intentions that the money be used for the children. If the intention is to pass control of the account to the children, then a custodial account should be considered.
Information at their fingertips
As financial technology continues to advance, there will be new ways for kids to learn about financial concepts and for parents to invest for their future. If you have questions about how to get started saving for your children or grandchildren, make sure to talk with us. We can help you navigate your choices and make smart decisions for your goals.