If you really want to ensure that your children have a good future, you need to start saving and investing for your own retirement as well as for your kids.
Investing now will save your children from a deep dive into debt when they need to pay for things like college or their first home.
As a bonus, encourage your children to start investing early and demonstrate the importance of disciplined planning to them.
To give your child the best possible start in life, here’s what you need to know.
? Investing for Your Kids’ Education
Due to the high expense of education, Americans now owe about $1.5 trillion in student loans. You’ll be doing your children a huge favor by avoiding the full cost.
The two most well-known investment and savings vehicles for education are the Education Savings Account (ESA), frequently referred to as the Coverdell ESA after the senator who helped pioneer it, and the 529 plan, which is named after a part of the Internal Revenue Code.
Both plans allow your money to grow tax-free and are tax-free when withdrawn for qualified expenses.
What is an ESA?
With an ESA, you can spend up to $2,000 per child every year for a variety of elementary, secondary, and post-secondary school fees. Tuition, books, clothes, transportation, and room & board are all included.
If you and your spouse make less than $220,000 per year combined — or if you are single and earn below $110,000 — you can create an ESA for your child. However, when you earn more money, the amount you may donate decreases.
You will be unable to donate the entire $2,000 if your combined income exceeds $190,000 or $95,000 if you are single. Additionally, any contributions made in excess of the maximum may be subject to a 6% penalty tax.
While you cannot invest a large sum of money in an ESA, they do provide a great deal of investing flexibility.
Funds can be invested in equities, bonds, or mutual funds, and you can rebalance your investments at any time to maximize your earnings.
After your child turns 18, you may continue investing, but your total contributions will be subject to a 6% penalty.
Additionally, the account should be emptied before your child’s 30th birthday to avoid paying income tax and a 10% penalty tax on any remaining funds.
What is a 529 plan?
Almost every state offers a “529 plan,” which is open to anybody regardless of income.
A 529 plan can be used to cover a variety of college fees or just tuition for K-12 education. The beneficiary may use the cash at any age in the majority of states. If your child wishes to attend college at the age of 35, that is perfectly acceptable.
With a 529 plan, your investment options are more limited. Generally, you can choose between two or three investment portfolios, but nothing more specific than that. Additionally, you may only reallocate funds within your 529 accounts twice a year.
Contributions can be as much as $14,000 per year. These plans do, however, have maximum contribution limits, with certain plans allowing contributions of up to $300,000.
You could choose a 529 plan from a state other than your own, though you may forfeit some tax benefits.
? Investing for Your Kids’ Additional Expenses
In your child’s twenties and thirties, life will get more expensive, with a wedding, a first home, and kids of their own all in the future. Even a small nest egg could go a long way.
A gift account or a transfer account established underneath the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) may be appropriate.
You’ll retain control until your child reaches the age of majority, at which point they’ll be entitled to spend the money any way they like.
A UGMA enables you to give your child cash, stocks, bonds, and insurance products without the need to establish a trust.
The gifts are maintained in the account. They are then administered by you (or another custodian) till the kid reaches the age of 18.
Meanwhile, UTMA plans allow for the gifting of virtually any asset, including property investment, patents, royalties, and artwork.
The account typically closes after your child reaches the age of 21. Although, some states permit custodians to retain control until the child reaches the age of 25. Not all states provide UTMA coverage.
As a result, there are tax advantages for each of these accounts. Tax-free “unearned income” for minors will be $1,100 in 2020. After $1,100, the child’s tax bracket is used, which is 10 percent. The remainder will be taxed according to your individual tax rate.
Keep in mind that having a large sum of money in your child’s name may affect their chances of receiving financial aid.
Acorns Early is a great option for UGMA/UTMA accounts.
The program will automatically deposit any extra change you have from your purchases into a savings account for your child.
When your child is old enough to get their windfall, you won’t have to worry about it.
? Motivate your kids to invest
The other approach to ensure that your financial gifts are put to good use is to instill a habit of saving and investing in your children from an early age. This critical understanding is a gift in and of itself.
Consider buying them an age-appropriate Greenlight debit card to teach them about saving.
Greenlight gives you complete control over where your children can spend their money and even allows you to choose your own parent-paid interest rate.
You’ll be able to demonstrate to your children how their money grows each month as they make wise choices.
To begin investing, locate an online broker that requires no minimum deposit and charges a reasonable fee. Stash is an excellent tool for investing little sums of money and is available for as little as $1 a month.
Walt Disney and Nintendo are all excellent investments for children. Engage them in the selection of one or two firms and assist them in tracking the rise of their equities.
Once they’ve mastered the fundamentals and have grown a little older, you may start building your child a portfolio of easy-to-manage index funds or exchange-traded funds.
Index funds replicate a market index — for example, the S&P 500, which monitors 500 of the largest firms in the United States — by allowing you to buy a piece of each stock. Index funds charge modest fees but typically perform well in terms of achieving their objective.
Meanwhile, ETFs are diversified investment portfolios that trade similarly to individual equities. Additionally, they charge cheap management fees.
? Compelling Your Kids to Begin Investing for Retirement
You are aware of the saying that it is never too early to begin saving for retirement.
If your teen earns money — perhaps through babysitting or pizza delivery — you can start a Custodial IRA in his or her name.
As is customary, you can choose either a standard or Roth IRA, but a Roth IRA gives your child greater control over the money. Contributions are reimbursable tax-free at any time.
Custodial IRAs are managed by you until your child reaches the age of 18 or 21, depending on the state, during which point they gain ownership. The account’s growth will be tax-free.
Seeing their IRA grow year after year teaches your child the value of saving and the wonders of compound interest.
The proof will be self-evident. The true trick is convincing children to part with their hard-earned pocket money in the first place.
The desire to invest for your kids and give your child the best possible financial start is understandable, but first, ensure your own finances are in order.
If you’re still struggling to save 15% of your pre-tax salary for retirement or are still working to pay off debt, focus your efforts on yourself for the time being.
The Facet Wealth certified financial planners might be able to assist you; they have a special plan for young families.
Finally, don’t feel compelled to set up a wide range of investments for your kids. It’s just as generous if you put important costs like schooling first.
Consider the importance of providing a good example for your children when it comes to making investment decisions.