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What is the Best Way to Save Money for a Child's Future?

When it comes to giving your child a financial head start, the tools you use can make all the difference. Between trust funds, custodial accounts and savings plans, numerous options are available. The best one depends on your financial goals, the level of control you want to maintain over the money and how you want your child to access it in the future.

Let us walk through the most popular ways to save for a child and help you determine the best fit.

Start Simple: Youth Savings Accounts

For parents who want to introduce their child to money management early, a youth savings account — an account typically co-owned by a parent and child — is a great place to begin.

Children can learn to make deposits, check balances and track progress toward savings goals. Many banks offer mobile apps with educational tools or even debit cards with spending limits.

Some accounts come with perks, such as birthday rewards or no-fee structures, but be sure to check for things like minimum balances and interest rates. Typically, when your child turns 18, the account will convert into a regular adult account, or you can continue as joint owners.

Looking Ahead: Custodial Accounts for Bigger Goals

A custodial account can be the right choice if you want to give your child access to more than just cash, and you are okay with them taking control of the money once they reach adulthood.

Custodial accounts fall under either the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act. These accounts enable you to invest in various assets like stocks, bonds, mutual funds or even real estate. Though the parent or guardian manages the account, the assets belong to the child and must be transferred to them when they turn 18 or 21, depending on state laws.

These accounts allow for a broader range of investments and potential long-term growth. However, since the assets legally belong to the child, these can impact the eligibility for college financial aid.

The 529 Plan: Tailored for Education

If your goal is to fund college or even private school, a 529 education savings plan is worth considering. These accounts offer major tax advantages: contributions grow tax-free, and withdrawals for qualified education expenses like tuition, books, or even student loan repayments are not taxed.

There are two main types: savings plans, which work like investment accounts; and prepaid plans, which allow you to lock in tuition at current rates at participating schools. Contributions are not subject to federal gift tax up to certain limits, and you may also qualify for state tax deductions depending on where you live.

Trust Funds: More Control, More Planning

A trust fund is a legal arrangement where you set aside assets for your child, and a trustee manages those assets according to your instructions. Trusts can be structured in many ways, revocable (changeable) or irrevocable (permanent) and are tailored to suit long-term goals like education, housing or general financial support.

One of the biggest advantages of a trust fund is the control it affords, as you can decide when and how the money is distributed. Trusts also provide asset protection. An irrevocable trust, for instance, may shield the funds from creditors or legal judgments.

However, trust funds are more complex and typically require the assistance of an estate planning attorney to set up properly. You will need to appoint a trustee, often someone other than yourself, who is responsible for managing investments, keeping records, filing taxes and distributing money according to the rules you establish.

Finding the Right Fit

Each of the options discussed above comes with trade-offs in terms of flexibility, control, taxes and financial aid impacts. That is why it is wise to consult with a financial advisor or estate attorney while making a decision, especially if you are considering setting up a trust.

Planning ahead can provide your child with the financial stability and knowledge they need later in life. The right account can help turn today’s dollars into tomorrow’s opportunities.

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