How to Save For Your Kids’ Future
Custodial Accounts: They’re a tool that can help your children start saving and learning about investing.
Why create an investment plan for your children?
- You’re already investing time and love in your kids
- You can help a child you love by creating a financial plan
- Have conversations about money with your children
You love them. You raise them. They’re your pride and joy. You sit through their softball games and grit your teeth as you teach them to drive.
After investing so much time and love in their development, it makes sense that you’d also want them to start out their adult lives with financial skills and some money set aside to kickstart their future happiness.
You can help your children save for so many things. There may be college tuition, a down payment on a house, a wedding, or your first grandchild. Those are some of the good things. But life can also present challenges. Medical bills, job changes, and unexpected disasters can throw the best-laid plans into a tailspin.
It can be tough to talk to your kids about money. And it can be hard to start the conversation. Having a tool to help you start small and explain to them where the money is going and how it can give them skills that they can take with them for the rest of their lives.
Saving money is more important than ever
There’s more at stake than just money in the bank. The world is full of financial pitfalls that can prevent our kids from realizing their best lives.
And when it comes to educational debt, about 44 million collectively owe $1.5 trillion, and students with undergraduate college degrees on average owe about $37,000.
There may be other financial traps along the way—credit cards, money scams, or even missing investing opportunities because people are afraid of investing, or know too little about it.
We want our kids to have better lives than we did. When it comes to financial matters, you can put money aside for them and teach them at the same time.
And now you don’t have to be a financial expert to do it.
- Consider talking to your kids about saving and investing
- Involve your children in aspects of your own financial life
- An early start can make a big difference
Creating a savings and investment plan for your kids can seem like a big challenge. Where do you start, and when?
It actually starts with the “big talk.” No, the other “big talk.” The one about money.
Teaching our kids to be financially literate can mean different things at different ages.
When they’re little, you can start by teaching them the value of money, for example by paying them in change to complete helpful tasks or chores. Or you can show them how saved coins add up, and can eventually become enough money to purchase real things.
You can also start to involve them in your financial life. If you’re going on a grocery shopping trip, sit down with them beforehand and discuss the price of things with them, how much money you have to spend, what you’ll be able to buy, and what you can’t.
As they get older, and they’re starting to collect a real allowance, help them open a savings account and encourage them to create fully-realized savings goals.
They could be “things I want now” (money for going out on weekends), “things I need” (prom tickets, a new laptop), long-term goals (money for college), and charity (giving money to a cause that excites them).
As your kids get enter adulthood, you’ll want to help them understand more complex concepts, such as what interest rates are and how they affect credit card and mortgage rates. You’ll need to teach them about what to expect when they take out loans, and how to steer clear of harmful debt.
Learning the value of money
It’s never too early to help your kids understand the value of money. Money is a resource, and your children have a role in learning how to save it and use it wisely years from now.
You can help them imagine their financial future.
Not sure where to start? Check out Stash Academy, where you’ll have access to games and activities to teach your children about the value of money, the difference between “needs and wants,” and many other building blocks for financial literacy.
The longer your children save, thanks to the power of compounding—where the interest on their money also earns interest—the more money they’re likely to have. And that can give them a tremendous boost later in life.
The following graph will help to illustrate the principle of compounding. The purple line shows how compounding might work if you saved $500 annually for 65 years. The dotted green line illustrates how compounding might work if these contributions stopped at age 20. The yellow line shows what compounding might look like if you made $500 annual contributions, starting at age 30.
Custodial, savings, 529s, and trust accounts
- Savings options: bank accounts, custodial accounts, 529s, and trusts
- A custodial account is a brokerage account for your kids
- The custodian manages the account until the child becomes an adult
Now that you know how to talk to your kids, it’s time to think about an investment plan. The good news is that you have numerous savings options.
Important: You or your child’s other guardian will have to co-sign on the account, as children aren’t legally able to open their own accounts.
Here are options you may want to consider:
Any adult can open a custodial account at a bank or other financial institution for a child.
What are they? A custodial account is essentially brokerage accounts that benefit a child, with some investing and tax benefits. When you set up an account for a child, you’ll be able to invest funds in stocks, bonds, cash, and other market securities on their behalf.
Custodial accounts have been around for decades. They’re also known as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. Generally speaking, different states typically allow one versus another. UTMAs allow for investments in more types of assets, including real estate. UGMAs confine themselves to more traditional securities (like stocks, bonds, and funds).
Stash offers both types of accounts, based on state requirements.
It’s important to keep in mind that all investing involves risk. Investing in securities is subject to market volatility, and investors can lose money.
Investing for your kids with Stash
Once you open a custodial account, the money belongs to the child. The child does not have control of the account, however, until he or she becomes an adult, which is usually between 18 and 21 years of age. (The age of majority varies from state to state.)
There’s no limit to how much a custodian—or the parent—can put into an account each year and no maximum lifetime limit.
Important tax note: The custodian can put up to $15,000 into the account, without triggering the gift tax. (For married couples, the amount is $30,000 for 2018.) Annual contributions, however, are not tax-deferred as they are with retirement accounts such as a traditional IRAs. Please consult a tax professional to further discuss the most ideal approach for your personal tax situation.
The first $1,050 of income, or capital gains, from the account is not taxed annually. After that, it’s taxed at the child’s rate, generally between 10% and 15%. Any amount over $2,100 is then taxed at the custodian’s higher individual income tax rate, according to the most recent information from the IRS.
The following chart helps to illustrate how making regular deposits to a custodial account, plus compounding, can help create savings:
People most typically open these at a local bank but are increasingly turning to online apps for savings accounts. Savings accounts won’t earn a lot of interest—the national average is .08%. But funds are generally insured by the Federal Deposit and Insurance Corporation (FDIC) up to $250,000.
A 529 must be used exclusively to fund a child’s higher education, or for related educational expenses. The minor is not the owner. Instead, the custodian of the account maintains control for as long as the account exists.
There are lifetime contribution limits to a 529, which vary by state and are generally between $235,000 and $512,000, according to US News & World Report.
Keep in mind:
- Money in a 529 is typically invested in a portfolio of stocks, bonds, and funds, similar to a custodial account.
- Unlike a custodial account, earnings in a 529 grow on a tax-deferred basis. Individual states offer their own 529s, but you are not limited to your state of residence to select a plan.
- Most states offer a tax deduction for funding the accounts, and you don’t pay federal or state taxes for distributions that go toward qualified educational expenses.
- A 529 can reduce the amount of financial aid your child will receive.
Trusts are often thought of as the exclusive territory of the wealthy. But anyone can set one up.
Trusts can hold more than just cash and investments. They can also hold property and buildings, insurance policies, intellectual property, and IOUs.
When you create a trust, you’re putting more conditions on how your children can use the money.
For example, trusts can be irrevocable or revocable.
Generally speaking, the conditions for accessing money in an irrevocable trust can’t be changed or amended, while they can change in revocable trusts.
An irrevocable trust can also last for generations, providing your children and theirs with a specified amount of income for many years to come.
By contrast, a revocable trust also referred to as a living trust, can be set up as an account for you to create savings during your lifetime. (An irrevocable trust is also set up prior to your death, but assets aren’t transferred to it until you die.) The conditions for funding it can also change over the course of your lifetime, but it becomes irrevocable upon your death.
Like custodial accounts and 529s, trusts can affect the ability of your child to get financial aid.
Trusts are subject to taxes on their distributions.
- Start a financial plan for your kids as soon as you can
- Teach your kids how to budget
- Set them up for a secure financial future
The best time to start planning an investment strategy for your children is now. It’s a strategy you should consider sharing with your child as part of their ongoing financial literacy and education.
By teaching your children the value of money, and showing them how to budget, invest, and save, you can help set them up for a more secure, and potentially more successful life.
Why is it more important than ever for Americans to save?
All of the above. In 2018, almost 40% of Americans couldn’t come up with $400 to cover an emergency expense. Almost one third nearing the age of retirement didn’t have any retirement savings. And 44 million Americans collectively owed $1.5 trillion in student loan debt. For this reason, it’s more important than ever for Americans to save and invest in emergency funds, education, and retirement. The earlier we start, the better.
What are the potential benefits of investing on the behalf of a child?
All of the above. The longer you invest on the behalf of a child, the more money they’re likely to have, thanks to the power of compounding. That can give them a tremendous boost later in life. In addition, when you start early, you might have the ability to take greater risks with increased time to ride out the market’s highs and lows, and it can be a great opportunity to teach them healthy financial habits along the way.
What money lessons can you teach the younger kids in your life?
All of the above. As kids begin to read and count, they can also start to learn about money. When they’re little, kids can begin to count money and learn the value of different coins and dollars. As they develop their reasoning skills, they can start to understand scarcity and the need to budget. They can also begin to decipher short and long-term goals and the difference between saving and investing.
What’s a custodial account?
A flexible investing account for a child. A custodial account is essentially brokerage accounts that benefit a child, with some investing and tax benefits. When you set up an account for a child, you’ll be able to invest funds in stocks, bonds, cash, and other market securities on their behalf.
Who can open a custodial account?
Any of the above. Custodial accounts can help you give the gift of saving, investing, and financial education to anyone who’s a minor. This can include your own kids, grandchildren, nieces, nephews, even children of friends…you get the point.
What can you use a custodial account for?
Any of the above. Custodial accounts are flexible and can be used for milestones such as higher education expenses, the first downpayment on a house—or unexpected emergencies and medical bills. While a 529’s can only fund the cost of education expenses, funds from a custodial account can be used to cover any expense in a child’s future.