The birth of a child often brings a shift in financial priorities. It’s an ideal time to explore types of accounts that can help both new and seasoned parents work toward their savings goals for their children.
A 529 Education Savings Account. After running education-funding schedules for my clients for years and seeing the rise in tuition costs, I knew establishing a 529 Education Savings Account right away for our little one was important. As soon as we received his Social Security number, I was online setting up his account. If you’re not familiar, a 529 account is set up specifically to assist the beneficiary in saving for education costs. Future distributions and earnings are all tax free, assuming the funds truly are used on qualified education expenses; otherwise the earnings are taxed and penalized.
Contributions to a 529 may also be state-tax deductible depending on the state you live in and that state’s specific tax rules. I should mention that grandparents may consider saving for their grandchildren’s education, too. In addition to lifting the financial burden from their child and grandchild, there are also tax-saving benefits.
UTMAs/UGMA Accounts. Saving for education may not be your first or only priority when it comes to your child. Many of us want to establish an account for our children that does not limit spending to education only. If you fall into this category, you may want to open an UTMA (Uniform Transfers to Minors Act) Account for your child. This type of account can be established with your bank or as an investment account. Funds can be added and/or distributed with more flexibility, meaning there’s no requirement to use the funds on education.
Keep in mind these types of accounts are truly in the child’s name, with you or another parent/guardian listed as custodian. That means at the age of majority (age 21 in Pennsylvania) those funds are truly theirs to use in whatever manner they’d like. I only recommend funding these types of accounts to those who are comfortable with their 21-year-old making financial decisions. If you’re not, an UTMA may not be the appropriate account for you and your child.
These are just two of the most common types of accounts that many start saving into for their children. However, there may be other options that will allow you to meet your goals, especially as your children get older and your financial situation changes. As always, I highly recommend working with your financial advisor to develop an appropriate and efficient savings plan for you and your family.
Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.