Mamas on Bedrest: 5 Ways to Save for Your Children’s Future

June 20th, 2012

I just completed the necessary paperwork to establish trust funds for my children within my health and wellness business.  After tomorrow, my children will be independent business owners and will be able to assume their businesses at the age of 18.

I had been told that I could establish trust funds for them early on, but kind of shied away from the idea. I honestly don’t know why. But when the idea was proposed again a couple of months ago, my mind was ripe or the idea and I set about preparing the necessary paperwork.

This is the third savings vehicle that I have for each of my children. They each also have standard bank savings accounts into which we put the assorted birthday money and such. They also have 529 College Savings funds which I established when they were each born and I am sorry to say that I have not been as diligent as I should be in contributing to them. I like the idea of being able to build businesses for them from my business that will create wealth for them and secure their futures. It’s something that I am already doing and it will be easy to nurture their trusts along in the process.

So what is the best way to save for your children’s futures? It’s really hard to know, but I say that’s it’s any way that will enable you to contribute to the plan/fund/account regularly and that grows at a substantial rate. As I contemplated my savings plans for my children, I looked into what other options are available and found 5 good options for saving for your children’s future.

1. A Typical Savings Account.

This is where I started with each of my children. When they were born and as soon as I was able to get them social security numbers, I went to my local bank and opened savings accounts for them. It seemed like the right thing to do. But I quickly found that the ability for the money to grow in a typical share savings account is really limited. Interest is calculated according to national financial data and we all know that currently our nation’s (the United States that is) financial health is pretty much in the crapper. So suffice it to say that interest rates on my children’s savings accounts are nominal at best, about 0.5 to 2%. I wanted something more.

2. College Savings Accounts.

A 529 College Savings planis a savings account that allows your money to grow tax deferred. Withdrawals for qualified college expenses are federal income tax-free. Some states also offer upfront tax deductions. My children’s 529 plans are comprised of mutual funds and I have my children’s accounts managed by the same company that manages my retirement accounts and they are earning a tidy little sum. Any good financial planner can help you establish a 529 College Savings account for your children.

Another type of college savings account is a Coverdell Educational Savings account. From what I can tell, a Coverdell account is very similar to a 529 College Savings account. A Coverdell is an account that allows your earnings to grow tax deferred. If you use the money to pay for qualified education expenses, your withdrawals are tax-free. However, from what I have read, there are a few tax advantages available up front with the 529 that may not be available with the Coverdell. Other than that, the accounts look amazingly similar to me. So my suggestion to you is that if you are trying to decide between a 529 savings account and a Coverdell Educational Savings account, you should consult with a financial planner knowledgeable about college savings plans.

3. The Uniform Transfers to Minors Act or Uniform Gifts to Minors Act (UTMA or UGMA)

The quick definition of these custodial accounts is

A trust often used to set aside money for a child’s college education. In many cases, a parent will give up to $10,000 per year per child to take advantage of a tax exemption on gifts.

But the back story to these accounts is

The Uniform Law Commissioners adopted the Uniform Gifts to Minors Act (UGMA) in 1956. The primary focus then was to provide a convenient way to make gifts of money and securities to minors. Later, it became clear that a more flexible law was desirable. The Uniform Law Commissioners adopted the Uniform Transfers to Minors Act (UTMA) in 1986. UTMA expands the types of property you can transfer to a minor, and provides that you can make other types of transfers besides gifts.

Custodial accounts are similar in some ways to trusts. Both place property under the control of a person who isn’t the beneficial owner — that is, the person who has the ultimate right to enjoy the fruits of the property. In the case of a trust, a trustee manages the property for the benefit of the beneficiaries. In the case of a custodial account, the custodian manages the property for the benefit of the minor.

Yet custodial accounts are not trusts. In fact, the whole point of UGMA and UTMA is to permit you to transfer property to a minor without establishing a trust. The legal framework for trusts is much more elaborate than for custodial accounts. Generally speaking, trusts are more expensive, complicated and time-consuming than custodial accounts.

There are good reasons to use trusts in many situations, however. Trusts provide greater protections and more flexibility. Generally you should think of using a trust when you expect to transfer tens of thousands of dollars. Custodial accounts are more suitable for smaller transfers.

4. Trust Funds

I think that the above passage gives a really good explanation of trust funds and how they differ from custodial funds. The reason that I chose to establish trust funds for my children that will arise from me and their trustees managing their businesses within my business is that my children are young and on the scheme of things so am I. At 9 and 6 years old respectively, I have roughly 12 years to grow their trusts. That is pretty easy given that I have roughly another 20 years to work myself! Being able to contribute to their trusts on a regular basis while building them businesses is a win-win all around. (If you want to learn more about how I have my kids’ trusts built within my business, e-mail info@mamasonbedrest.com.)

5. IRA Accounts

I was really surprised to see Roth IRA’s listed as a way to save for your child’s future. to me, a Roth has always been a way to save for retirement, so the idea of establishing an account for my little ones seemed counter intuitive. However, these are the facts:

  • Parents can give their kids a financial head start by opening a Roth IRA in the child’s name once the child starts earning income. This can be as little as a paper route or having your young child work for you in your business. (Check with local/state/federal laws but I think you can have your child “work” for you as young as age 7.)
  • Children over the age of 18 retain control of the account, and certain legal retrictions prevent your child or other investors from taking earnings out penalty free before the age of 59 1/2.
  • As with anything, there are exceptions to this rule. If your child becomes disabled, they may be able to make withdrawals from their Roth IRA to meet their financial needs. Roth funds can be used for educational expenses or for  purchasing a first home.

As you can see, there are many ways to save for your child’s future. It takes some investigating and research, but a bit of work up front can provide you with a reasonable way to set money aside for your children and for it to accummulate to a sizeable nest egg for your children’s future. If you are unsure of which way to save is best for you, consult with a certified financial planner for advice.

References
Bankrate.com

Edward Jones

Fairmark.com

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