In addition to family, education was held in the highest regards growing up. For my immigrant parents, college was an expectation for my sister and me – to them, it was also a reflection of their sacrifice and hard work.
When I talk to my clients, I ask them what financial success for their kids means to them. Whether it’s college, helping them buy a home, wanting them to make smart money choices or leaving a monetary legacy, I remind them that it doesn’t have to be what their parents expected of them growing up.
Depending on your financial goals, here are different types of accounts you can set up for your kids:
529 Plan or Coverdell Education Savings Account
These are tax-advantaged accounts designed to help pay for qualified educational expenses (think tuition, room and board, books, etc.). You contribute with after tax dollars and the money in the account has tax-deferred growth potential. As long as the funds withdrawn are used for qualified educational expenses, you avoid paying taxes and penalties. There’s a maximum limit you can contribute to each plan as well as certain income guidelines. More recently, 529 plans now allow for conversions into Roth IRA plans for your kids with these limitations:
- The account would need to have been opened for 15 years;
- The maximum contribution limit converted to the Roth is set every year by the IRS;
- The maximum lifetime 529 to Roth conversion is $35,000 (as of where it stands now)
Non-qualified accounts
If you don’t have a specific goal like college, non-qualified accounts can be a way to invest for your child without the same restrictions as retirement and education accounts. For example, these accounts may be used for large purchases like a car or down payment on a property. These accounts are typically a mid- to long-term investment (at least 5 years or more) and you have to consider potential capital gains tax implications.
Custodial Roth IRA
If your child earns income, you can set them up with a Roth IRA that you’ll invest and manage for them until 18 or 21 (depending on your state). At that time, you must transfer the account under their ownership. Roth contribution limits apply, and you’ll need to consider additional costs like payroll fees.
Juvenile life insurance policies
You can buy a cash value insurance policy for your child as early as they’re born to help them set their insurance foundation for their future goals. It’s important to note that taking care of your life insurance needs is priority before considering getting one for your child. Most kids do not have to go through a medical exam to be eligible.
Of course, this only scratches the surface and it’s important to consult with your financial advisor and your tax professional to find the right strategies, understand the guidelines and potential implications. No matter what the FAQ your goals are for your kids, start investing early!