One of the most brilliant ideas that parents come up with when it comes to savings for their kids include opening a savings account. This is one move that parents feel would guarantee their kids a lifetime of thrift and prosperity. However, you could be drastically wrong in this case for fact remains if you land up choosing the wrong savings vehicle, then there are high chances that the kid can land up in debt in future and would be left looking for debt management plans instead. If you’re thinking on the lines of saving for your kids, then one thing that you’ve got to understand is that the wrong savings vehicle could cost your children thousands of dollars in avoidable taxes and missed financial aid in future.
The best ways to adopt when it comes to saving for your kids
You needn’t fret too much since there are several ways in which you can save money for your kids which won’t really put your child’s future financial aid at risk. Take a look at the following ways by which you can safely stash away cash.
The UGMA and UTMA accounts
If your kid doesn’t really plan to attend college and therefore isn’t at a risk of losing financial aid, then the UGMA and UTMA custodial accounts are known to offer decent tax breaks for those when your child is under 18 years of age. Now, what essentially happens with these accounts is that the initial 950 dollars will be taxed at the child’s income tax rate. As for the remainder, then it’ll be taxed at your income tax rate since you’re the parent. These are happening as per the IRS rules. Moreover, the good part is that there are no restrictions involved as far as how the funds are going to be used and that too so long as it’s directly used for the benefit of your child.
Now, there’s essentially a downside involved in the story as well for fact remains that as parents slowly you’ll be having less control over how exactly your child or children are going to spend money. You’d obviously not want your kids to misuse money and land up in debt, for then they’ll need to look for a suitable debt management program instead.
The 529 college plans
Now, if your kid plans to attend college, then one of the most popular methods for saving would be through a college savings plan. The 529 college savings plan happens to be the best option in such a case and it operates on similar lines of the IRA and the 401(K). The 529 college savings plan actually gives you the opportunity as a parent to save for your child’s education and that too in a tax free manner. This is all the more beneficial for a huge array of investment options is available. You get to put your funds in aggressive investments while your kid is still young and then you can automatically switch over these funds to a more stable option as your child approaches college age.
There are undoubtedly major tax advantages involved with this particular plan. However, it’d be wise on your part to keep in mind the restrictions as well. If you go by what the US Securities and Exchange Commission has to say, then the 529 college savings fund can be utilized tax free only in case of qualified educational expenses like tuition books, fees, supplies, etc. Be warned of the fact that money spent on any unqualified expense will be subject to income tax and a 10 percent penalty on earnings.
The Roth IRA option
Ultimately, there’s always the option of giving your kids a financial head start and that can be done by opening a Roth IRA account on your kid’s name once he or she starts earning a certain income.
Keep in mind the above options when you’re looking to save for your kids.
Yasmine Wilson is a financial writer associated with Debtcc community. She loves writing finance related topics such as debt, credit, savings, investment, etc.
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