Saving for Their Future: Financial Planning Tips for Your Growing Children

Now, more than ever, it’s important that parents take the steps to ensure their children have a solid financial footing. This can be achieved through proper financial planning.

Prices for nearly everything simply continue to rise, with millennials and Gen Z being primed for rather dismal financial futures. As a result, new parents have no time to waste. With swift, smart action, you can ensure that your children will have the best possible springboard for a successful future.

In our latest personal finance blog, we offer some financial planning options new parents can implement today for their child’s tomorrow.

Consider a Children’s Saving Account

One of the simplest and easiest ways to get your children set up for success is by opening up a children’s savings account. This is pretty common but can be a valuable way to save money for your child and to teach them valuable lessons. This account may not be your primary way of saving for the future but it could pay dividends in other ways.

As your child grows up, you could upgrade to a teen account with more leeway that is still co-owned by the parents. This can give them room to develop good financial habits before they become adults and are responsible for managing money on their own.

Use a Roth IRA

If you’re saving for your own retirement, you might have heard of Roth IRAs. A Roth IRA is a type of retirement account that allows you to save, invest, and eventually take money out tax-free (provided certain conditions are met first).

But did you know you can open a Roth IRA for your kid, too? That’s right, as long as your child has “earned” income (i.e. wages, salary, basically any income from a job or self-employment gig) they are able to open and contribute to their own Roth IRA. For example, if your child earns $1,000 at a part-time job over the summer they would be able to contribute up to $1,000 to a Roth IRA. The amount you can contribute is limited to the lesser of your earned income or $6,000.

While Roth money should mainly be intended for retirement, there is one feature that could benefit your kids in the short-run. Assuming their Roth has been opened for more than 5 years, assets in the Roth can be withdrawn tax and penalty-free for a down-payment on their 1st home. Depending on how early they start saving, this could end up being a sizeable sum!

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Open a Custodial Account

If you would like a purpose-built account for your child that they can’t access until adulthood, a custodial account may be for you. A custodial account is a financial account that would be held in your child’s name but managed by the parent or guardian.

Most major banks and brokerage firms offer custodial accounts that can be tailored to you and your child’s needs. Custodial accounts can be a way for children to own securities such as stocks, bonds, ETFs and mutual funds they otherwise wouldn’t have access to. For this reason they can be a great tool to teach your kids about investing, the stock market, and the power of compounding returns.

Choose a Virginia 529 Plan

For many parents, a bulk of their financial planning revolves around sending their kids to college. Higher education is prohibitively expensive, so parents who wish to send their kids to college would be wise to start saving even before the child can talk. A 529 College Savings plan is a special type of investment account created specifically to help parents save for college.

There are several benefits to using a 529 account for college savings. On the tax side, any money you put into the account can be invested and grown tax-free (like an IRA). Then when it comes time to send your kid to college you can withdraw money from the account tax-free to pay for “qualified” expenses, such as tuition, room & board, and books. Most states will also give you a tax deduction on your state tax return for contributions you make to the account each year. In Virginia, you can write-off up to $4,000 of contributions per account.

Additionally, 529 college accounts have less of an impact on FAFSA® financial-aid eligibility compared to custodial accounts. So, if it is likely your child will need student loans to attend college, you should consider using a 529 as the primary savings source.

Virginia has a good 529 plan relative to other states, making it a viable and smart decision for parents or guardians in the state. You are free to use any state’s plan regardless of where you live. The reason you might choose another state’s plan is that your state doesn’t offer a tax-write off (i.e. Texas, Florida), or another state has lower fees or better investment options. Bottom line, 529 plans are widely available and easy to set up so they are close to a no-brainer as an option for college savings.

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Use a Trust Fund

If you have a relatively average income and/or modest net worth, then setting up a trust fund is probably not a good idea for you. Trusts are typically used as a planning tool for high earners and those with substantial assets.

Trust funds work by transferring ownership of certain assets into the name of a trust. From there, the trust dictates who has access to the money, when they can access it, and how much they can get. Basically it’s a way to set up “safety rails” for your heirs, as opposed to letting them inherit (and potentially blow) money outright.

Trust funds can own nearly anything of value, from cash, stocks, and mutual funds, to entire businesses.

Trusts cost anywhere from $1,000 to $3,000+ to have set up, though, so it’s generally not advised unless you have enough assets to warrant the steep cost and ongoing maintenance.

Don’t Forget Personal Financial Education

While setting up various accounts for your children is a fantastic way to help them, it may all be for naught without proper education. If your children don’t have a solid educational foundation, you may see their money melt away on bad purchases.

Here, starting off with savings and checking accounts can be an easy way to start teaching them when they’re young. Their early years can be used learning the basics of personal finance, while the later years can be spent learning more complex topics.

One mistake parents often make is waiting too long to start financial education. In a perfect world financial literacy would be part of the school curriculum, but ultimately it is still the parent’s responsibility to provide a strong financial background for their children.

Build Your Family’s Future with Financial Planning Services from Taylor Hoffman!

At Taylor Hoffman, we understand the importance of financial planning and knowledge. For individual or business-oriented financial advice, our team would be happy to work with you. Contact our office today to receive more information!