You’ve got the crib. The baby monitor. The stroller. The highest-rated-for-safety car seat. You’ve thought of everything for that newest member of your family. Or have you? What about your baby’s financial future?
What kind of account should you open for your child, and when should you do it? According to financial planning experts, it is never too soon to set up a savings account for your child as well as a college savings plan. Here are some guidelines for different types of accounts:
Children under the age of 18 are not legally allowed to sign documents, so when you open the savings account you will need to have both your name and the child’s name on the account. When the child turns 18, you can remove your name permanently. While your child is still a minor, however, you will be the one who will have control of the account. You will have the ability to make withdrawals or deposits and close it if necessary.
What you’ll need: The child’s birth certificate and Social Security number, and your photo ID.
Fine print: Make sure you read the fine print on the type of account you are opening — are there fees? Is there a minimum balance required? Can you attach the account to other existing accounts in order to waive fees? What’s the interest rate?
Why saving early is a great Idea
How about this? Put $5 a week from birth into a savings account that earns one percent interest rate compounded monthly; your child would have $5,605.68 on their 21st birthday ($5,577.41 if compounded yearly).
529 college savings account
A favorite of financial advisors, these accounts, which are sponsored by states, allow parents to invest after-tax money that then grows tax-free and remains tax-free if you use it to pay for tuition.
Each state runs its 529 differently. Some states have only one program, such as Alabama with its CollegeCounts 529 fund. Other states offer options, such as New Mexico, which has the Scholar’s Edge program and The Education Plan’s college savings program. Some programs require you to go through a program administrator designated by the state while others allow you to self-administer.
Did you know: You don’t have to live in a state to use its 529, although you may be charged additional fees. If you use your own state’s 529, you might be able to deduct part of your 529 contributions from your state tax bill, which can save you a lot of money if you live in a state with high taxes.
Fine print: If you take money out of a 529 plan for anything other than educational purposes, you’ll be assessed a 10 percent penalty on the earnings, plus you’ll have to pay federal taxes on the earnings. To top it off, some states add another 10 percent penalty for early withdrawal.
Some 529 plans impose heavy penalties for withdrawing the money in the first three years. Some plans have age restrictions — for instance, they require your child to be younger than 15 to open an account.
Uniform Gifts to Minors Act
The Uniform Gifts to Minors Act (UGMA) allows minors to own property such as securities. The UGMA allows a minor to own assets without an attorney setting up a special trust fund. Under the UGMA, the ownership of the funds works like it does with any other trust except that the donor must appoint a custodian (the trustee) to look after the account. Access to the gift must be given to the minor when he or she reaches the age of majority, either 18 or 21 (sometimes even 25), depending on the laws of the state in which the account was created.
How did you—or will you— save while your children are very young?