Instead of another toy under the tree, a deposit into a young person’s account can become a nest egg for the future. When money is received for babies or children, it’s difficult to choose where to invest it. From bank accounts to custodial accounts and college funds, what’s the best place for this investment?
A major consideration in deciding what to do with these funds is the intent of the funds. For example, is the money specifically for college funding or for the child once they become an adult? Below, we help you make this decision by going over some of the more common savings vehicles for your children this holiday:
Section 529 Savings Plans
For saving specifically to help with college costs
A Section 529 savings plan allows money to accumulate over the years and then be withdrawn tax-free when used for qualified educational expenses. The age-based options offered by many 529 plans automatically takes care of investing the funds more aggressively when the child is younger and then more conservatively when the child gets closer to college age.
In addition, the assets in a 529 plan can be moved from one child to another in the same family, or even to cousins and other family members. The owner of the 529 plan has the ultimate ability to change the beneficiary. If the assets are meant to be the child’s no matter what, we recommend the next option, a custodial account.
Custodial Accounts
For general saving
Also called UTMAs or UGMAs depending on what state you live in, these funds legally become the child’s and can be used for any purpose. The custodian on the account (many times the parent) controls the investment and distribution of the funds until the child becomes of majority age (either 18 or 21 depending on your state). However, the funds must be used for the child, even when the custodian has control of the account. These funds can be invested in many different ways, including in stocks, bonds and mutual funds. The income tax on the custodial accounts is set at the child’s tax rate. These custodial assets, which then become assets of the child when they become an adult (either 18 or 21), can be used for college, but can also be used to purchase a car, make a down payment on a house or anything the child wants.
Bank Accounts
For earning and saving
Finally, if money is meant to be spending money for the child or is earned by the child (for example, by completing chores), opening a bank account would be appropriate. This same bank account can then be used to collect the individual’s paychecks when they become of working age. These accounts generally earn a lower rate of interest but tend to be liquid and safe.
Impact on Financial Aid for College
One other consideration when determining where to put assets is financial aid. Money in custodial accounts or bank accounts in the child’s name are considered assets of the child, and more heavily weighted when it comes to determining financial need. Funds in 529 plans are considered assets of the owner, not the child — so if it’s a parent, it will be considered parental assets. If owned by grandparents, the assets should not come into the financial need equation.
All of these options allow for small contributions to be made periodically to the accounts. It’s beneficial to have these types of accounts set up, especially if relatives want to make gifts around birthdays or the holidays. Starting when the child is a baby or very young allows for growth in the funds over the years.
If you’d like to learn more, please contact our team.
Opinions expressed are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision. Advisory services offered through Sikich Financial, an SEC Registered Investment Advisor.
