I was recently asked this question by a new father and thought I'd share some thoughts on the topic. Long gone are the days of a standard savings account or buying "bonds" for your kids or grandkids. Here are a few more advantageous ways to save and invest for your children.
Many of us are familiar with the burden of student loans and want to help their loved ones out as much as they possibly can. A 529 plan is one way to do this. This savings account allows you to save for your child or grandchild college education expense. All 50 states offer at least one type of 529 plan but contribution limits vary between states.
The main benefit of 529 plans is that the money grows tax deferred in the account. As long as you use the money for qualified education expenses, the money can be withdrawn tax-free. A new rule to the plan, thanks to President Trump's tax reform, is that the money can also be used for K-12 private school expenses.
The money in the account can be invested, usually through mutual funds, and some plans will have more investment options than others. What happens my child gets a scholarship? No worries, you can avoid the 10% withdrawal penalty up to the scholarship amount
Custodial accounts offer much more flexibility than 529 plans and allow the parent to retain control of the account until the child is 18 or 21. It's as simple as that. The beauty of the account is that the money can be used for anything, there are no withdrawal penalties, and the investment options are much wider.
You can also open a custodial IRA account. Just like you might have for yourself, this account be a roth IRA or traditional IRA. There are tax benefits but different rules between the two of them, which you can read by clicking here.
Saving for your child is important but always remember to take care of yourself first. Make sure you save enough for your own retirement and have your financial house in order before putting yourself under unnecessary pressure. If you have any questions feel free to reach out at any time, we're always happy to answer any questions you may have!