How to Plan for Your Child’s Financial Future

By Cole Purvis
Mother handing daughter a $10 bill

In a world where financial literacy is becoming increasingly crucial, setting your kids on the path to financial success has never been more important. And there’s no better time to start planning your child’s financial future than right now. From college savings to investment options like IRAs, let’s delve into practical steps that can shape a secure financial future for your kids.

529 Plans

A 529 plan is an investment account designed to help families pay for college. It is one of the most effective ways to help secure your child’s educational future. Similar to many retirement accounts, including a Roth IRA, the earnings on your 529 plan are tax-free throughout the life of the account. Because it is an account designed for education, money withdrawn from it will remain tax-free as long as it is spent on qualified education expenses. This includes tuition fees, boarding, computers and other expenses necessary to attend or enroll in a school program.

Custodial IRAs

A custodial IRA is an account that a custodian (typically a parent) holds for a minor with earned income. It provides an excellent opportunity for teenagers to learn about the value of saving early for retirement, the tax advantages of retirement accounts and the benefits of compounded growth.

It is important to consider that the maximum annual contribution for a custodial IRA is $7,000 for 2024. Contributions may not exceed the minor’s earned income for the year. For instance, if your child earns $2,000 in a year from babysitting, they may only contribute $2,000 to their IRA. Furthermore, all assets in a custodial IRA are managed by the custodian until the child reaches the age of 18 or 21, depending on the state you live in. Afterward, the beneficiary (your child) inherits the account and can manage it until they retire.

Custodial Brokerage Account

It’s never too early to teach your children about the benefits of smart investing. A custodial brokerage account gives them a platform to get familiarized with the nuances of trading in the stock market. The account is managed by an adult on behalf of a child. When the child reaches the age of majority in their state, they get full control of the account.

Some of the major benefits of a custodial brokerage account are that there are no limitations to how much you can contribute and that anyone can give toward it. Moreover, the funds from this account can be used at any time and for any purpose, unlike a college savings plan, as long as it is for the minor. For example, you may use the funds from this account to help finance their first car.

It’s Never Too Early… or Too Late

The earlier you begin preparing for your child’s financial future, the bigger their nest egg can become. The tactics we just discussed are but a few of the many ways you can provide for them now that they will thank you for in the future, and it’s never too late to get started. No matter their ages, the sooner you start planning for your kids’ futures, the more ready they will be to tackle financial roadblocks later in life.

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