Saving for your kids can help set them up for financial success as adults. When set aside regularly starting when they are young, even small amounts of money can add up to a sizable sum you can gift your child when they're older. There are lots of places to stash cash you want to earmark for your kids. The one (or more) that's right for you depends on how much you plan to save, how you want your child to use the money, when you want them to have access to it and how much control you want them to have over the funds. Here are six account types that can help you build a more financially secure future for your child.
1. High-Yield Savings or Money Market Account
When you're ready to ditch the piggy bank, a savings account can be a great place to save for specific goals, such as your child's first car. High-yield savings accounts (HYSAs) and money market accounts make it easy to automate saving, have higher interest rates than traditional savings accounts and can be opened at your local bank or credit union or online.
When you stash cash in these kinds of accounts, it's protected and easy to access when you need it. Accounts are insured for up to $250,000 per person, per account type at insured banks and credit unions. You may also be able to open the account in both your and your child's name, allowing you to involve your child in saving as they grow—and increasing the amount of insurance you'll have.
However, one of the downsides of savings accounts (even the high-yield variety) is that they may not always earn enough interest to outpace inflation. You could earn more elsewhere, but you also take on more risk. Additionally, some institutions limit the number of transfers or withdrawals you can make each month, so they may not be best for regular use.
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2. Certificate of Deposit (CD)
A certificate of deposit is a type of savings account. But instead of making regular deposits to grow your account balance, you make a single lump sum deposit and leave your money in the account for a predetermined amount of time, known as the term. Term lengths vary by institution.
The money you deposit into the account earns a guaranteed annual percentage yield (APY) for the term of the CD, which helps protect your investment if rates go down. However, if rates go up, you won't benefit from the higher yields.
CDs typically have higher yields than traditional savings accounts because you're agreeing not to withdraw your money for a set amount of time. If you need to access the funds before the term ends, you may have to pay a penalty. Like HYSAs and money market accounts, CDs and share certificates (the credit union equivalent of a CD) are generally insured for up to $250,000 per person, per account type.
CDs may be a good bet for short- or mid-term savings goals when you don't want to risk your initial deposit and aren't looking for aggressive long-term growth.
3. UTMA or UGMA Account
You can open a custodial account in your child's name under the Uniform Gifts for Minors Act (UGMA) or Uniform Transfers for Minors Act (UTMA). UTMAs and UGMAs are taxable investment accounts into which you can transfer various assets, including securities, real estate, art and more. All contributions are irrevocable and must be used for your child's benefit.
Your child owns the assets in an UTMA or UGMA; however, you retain control over the account until they reach the age of majority in your state. At that time, the account transfers to them, and they can use the money however they want. Since your child gains access to the assets at a young age, it's a good idea to teach them money management basics before they get their hands on the funds.
Contributions to UTMA and UGMA accounts are exempt from the federal gift tax up to the IRS- allowable limit, but earnings are taxed. UTMAs and UGMAs may be a good choice for parents who want an opportunity for a higher rate of return on their investment. These accounts are also great vehicles for doting grandparents and other family members to gift your child assets.
However, one of the big downsides of UTMAs and UGMAs is that, because the account is in your child's name, it may significantly impact need-based financial aid for college.
4. 529 Plan
A 529 plan is an investment account that helps parents save for college. Funds can be used to pay for various expenses, including tuition, room and board, books, computers, supplies and more. A portion of your contributions may be tax-deductible in some states, and withdrawals aren't subject to federal income taxes when you use the funds for qualifying education expenses. Withdrawals are also exempt from income tax in many states as well.
Fees for 529 accounts vary from state to state, and it's important to do your homework to understand how they may affect your investment returns. If you don't use all of the money in the account to pay for your child's education, you can roll over up to $35,000 of the remaining funds into a Roth IRA in your child's name, giving them a head start on retirement savings.
While 529s allow parents to save a boatload for their child's education, there are some downsides to be aware of. Returns are not guaranteed, and contributions made to a 529 plan are subject to market losses. You must report 529 funds in your child's Free Application for Federal Student Aid (FAFSA) calculation, which may affect their eligibility for need-based financial assistance. If you use the money for non-education expenses, you have to pay a tax penalty.
5. Trust
Trusts aren't just for the ultra-wealthy. However, they can be expensive to set up, and you'll likely need an attorney to draft the documents, so they're best reserved for larger sums of money you want to pass on to your child. A trust is a legal agreement that dictates how the assets you put into the trust will be distributed. Unlike an UTMA or UGMA, you can set up a trust so that you have a say over when and how your child can use the money they receive.
Depending on your child's needs, you can set up different types of trusts. Some are revocable, allowing you to make changes after they are established. Others are irrevocable, which means you can't change them after they're created.
6. ABLE Account
If you have a child with special needs who may need financial support throughout their lives, an ABLE account may be a good way to save. Achieving a Better Life Experience (ABLE) accounts are tax-free savings accounts your child can use to pay for disability-related expenses. To be eligible for an ABLE account, your child must have a qualifying disability before age 26. You may contribute up to the gift tax exclusion amount ($18,000 annually in 2024), and some people may be able to contribute more in certain situations.
Contributions are not tax-deductible, but investments grow tax-deferred, and withdrawals for eligible expenses aren't taxed. Perhaps most important, the money you contribute to an ABLE account won't affect your child's eligibility for government assistance, including Medicaid or Supplemental Security Income (SSI).
Preparing for the Future
Saving for your child's future is a great way to help them get off to a solid financial start. But if you don't teach them how to save, budget and manage money on their own, they won't be prepared for life in the "real world." Modeling healthy saving and spending habits, answering their money questions and teaching them about investing and compound interest can help your child avoid common financial setbacks that many young adults experience because they're not prepared to handle their finances independently.
