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3 Strategic Ways to Save Money for Your Child’s Future

blurry photo of young family of four looking into the distance

By exploring various money saving options, seeking professional guidance, and maximizing tax-efficient strategies, you can ensure your child’s financial security while embracing the journey of parenthood.

Author: Martin Lundgren

Saving money for your child’s future is not just a thoughtful gesture; it’s a critical step in securing their financial well-being. Parenthood brings a multitude of joys and responsibilities, one of which is ensuring your child’s future financial security. Below, we’re exploring how to strategically navigate the world of savings and investments to pave the way for your child’s future.

1. Review Your Cash Buffer and Sources of Income

Parenthood is a transformative journey, and ensuring your investment portfolio aligns with your new responsibilities is essential. It is common to see significant changes in cash flow, general budgets, expenses, and income. It can be helpful to ask the following questions:

  • Which recurring expenses will increase (mortgage, insurance, groceries, etc).?
  • What will be the cost of childcare? Tuition? 
  • How much should we invest for college savings?
  • How will our insurance premiums change?
  • What are considered “eligible expenses” for HSA and FSA accounts?

As financial advisors and planners, we recommend our clients check in on their financial planning periodically. Naturally, this is amplified when experiencing life changes or considering your family. (Even more so for the first time). 

2. Explore Various Savings Account Options

Financial planning is pivotal to fostering your child’s financial literacy and security. Remember, there’s no one-size-fits-all approach to strategically saving money for your child’s future. Researching savings account options tailored to their needs is essential to this process.

Many parents will consider these options:

529 College Plans 

Detailed further here, a 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. The State of Washington’s GET plan guarantees that the value of your account will keep pace with the cost of college tuition, no matter how much it changes in the future. Depending on your family circumstances, your financial advisor may recommend a mix of the two. 

UGMA/UTMA Accounts 

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are custodial arrangements used to hold assets for minors until they reach adulthood, typically 18 or 21, depending on the state.  

Assets transferred into these accounts become irrevocable gifts to the minor and are taxed at the minor’s rate, offering a tax advantage. Once a minor gains control, they can utilize the funds for various expenses — not necessarily education. This makes UGMA/UTMA accounts convenient for transferring assets to minors with certain tax benefits and control considerations. However, while they offer flexibility, it’s important to understand tax implications and contribution limits.

Coverdell Education Savings Accounts

Similar to Roth IRAs, a Coverdell education savings account (Coverdell ESA) is a trust or custodial account. These accounts are established solely to pay for qualified education expenses for the designated beneficiary. Coverdell accounts offer tax-free withdrawals for qualified educational expenses. Their yearly contribution limit makes them suitable for supplementing other savings vehicles.

As outlined by the IRS, There are specific requirements to set up a Coverdell ESA:

  • When the account is established, the designated beneficiary must be under the age of 18 or be a special needs beneficiary
  • The account must be designated as a Coverdell ESA when it is created
  • The document creating and governing the account must be in writing, and it must meet certain requirements

Trusts and Treasury Bonds

Establishing an education trust can provide long-term financial security for your child. Trusts offer flexibility and can be tailored to your specific needs and goals. Some parents also consider investing in treasury bonds as a low-risk option, as they provide steady returns. While both trusts and treasury bonds have their pros, there are some issues you should consider.

3. Seek Professional Guidance

Navigating the complexities of savings and investments can be daunting, especially when you add kids into the mix. Consult with a financial advisor early on to develop a comprehensive savings plan tailored to your family’s needs. Additionally, engage with tax and legal professionals to ensure compliance and maximize available benefits.

Remember to continue to plan for and prioritize your own retirement 

It’s important to remember that your children will have opportunities to build their own wealth or get student loans to support their education. You, however, cannot get a retirement loan.

Maximize Money Saving for your Child Through Strategic Planning

While financial planning is essential, parenthood is also about cherishing precious moments with your child. Embrace the joys and challenges that come with raising a family, knowing that your careful planning lays the foundation for a bright future.

Smartly saving money for your child’s future requires careful consideration and strategic planning. By understanding the nuances of each savings vehicle, you can leverage them effectively to secure your child’s financial future. Take advantage of tax-efficient savings strategies to maximize your contributions and minimize tax liabilities.

By exploring various savings options, seeking professional guidance, and maximizing tax-efficient strategies, you can ensure your child’s financial security while embracing the journey of parenthood. Start early, stay informed, and prioritize your family’s financial well-being for generations to come.

To speak with Northern Lights Advisors about planning for your child’s financial future, schedule a meeting today. 

 

The information in this article is not intended as tax, accounting, or legal advice. Read the full disclaimer here.

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