5 ways to save for your kids (or help your kids save!)

As many of my friends’ kids prepare for college or life outside the nest, I thought I’d share some ideas for how to make their exit less stressful. This is not a comprehensive list, but hopefully it will plant a few seeds.

#1. 529 savings plans

You’ve probably heard about these. They are the most well-known college savings vehicle. After seeing that some of my friends have experienced negative growth in these accounts (because the allocation to bonds was too high), I recommend discussing how you invest your 529 with an advisor. I also recommend starting sooner than later… like when Junior is still in diapers. These funds do offer tax advantages for residents of some states, but depending on your time horizon, you might be better off considering other options, like #4 below. There are other things to keep in mind with 529s, like the concern that your child won’t get financial aid if you’ve saved too much in the 529, but given the current and continuing rise in higher education costs, I’d say you’re most likely going to need every penny.

#2. ABLE accounts

Did you know that there’s a special tax-advantaged savings option for disabled kids? I learned about it in my tax course, and I wasn’t alone in my ignorance. I spoke to friends with disabled kids who also didn’t know. The trick is getting special status in the eyes of the government before your child turns 26.

These accounts offer several great features. Like with a 529 plan, you can save for your child’s future expenses without having to pay taxes on the gains, but it isn’t just for education. This makes it a great way to help pay for independent adult living later on. Many states offer tax deductions for these accounts, and if your family falls in a low to middle-income tax bracket, you may also qualify for a tax credit. Grandparents and other relatives can also set up ABLE accounts, and each account can be funded with up to $12,000K each year, making it a great way to transfer wealth to family members with disabilities.

#3. Custodial accounts

I recently helped my sister set these accounts up for my niece and nephew. We decided to go through E*trade because she already had an IRA with them (and because I’m partial to the trading platform), but I also like Schwab because they offer what they call “slices” – the ability to buy a fraction of a share. Keep an eye out for a future post where I discuss some tips and ideas for setting up and managing these accounts (and even using it as a way to get your kids interested in investing). Like 529s, too much money in these funds can cause problems when it comes to getting financial aid. They can also be tricky tax-wise, so be sure to discuss contributions with your financial planner.

#4. Savings bonds

I still remember exchanging the $2000 bond my grandfather gave me when I graduated from college. It was a mysterious process at the time. I knew it would be more than the face value, but how much? Right now, given the adjustment for inflation, savings bonds are paying 7.12%. This isn’t likely to change much when the new rates are announced on May 1. If your young scholar is close to graduating from high school and you want a safe, inflation-adjusted return on your investment, consider buying them ASAP. Note that you will want to hold them at least 18 months or more. If you’ve never bought them before, there are limitations, which you can read about when you buy them here.

#5. If you own your own company, put them to work.

Several friends of mine run their own businesses. There are a lot of great reasons to involve your kids if you can. You can employ them, helping them to start earning social security. (This has a double benefit if you are helping them to set up a custodial account.) As long as they are actually working, this is a great way to defer your business’s income to your child (at your child’s tax rate). Another option is to give your child a stake in your company. There are a lot of complex tax/legal issues here, so tread carefully and, you guessed it, consult a financial planner. 🙂

#6?

Did I miss anything? If you have a useful tip or tool for saving for your kids, please share below.

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