Building a Savings Plan for Your Children

May 1, 2011

Building a Savings Plan for Your ChildrenOne of the best ways you can provide for your children is to create a savings plan for them when they’re young and contribute to it gradually. As your children grow, so, too, will their savings.

You may also consider investing for your child, provided that the investments are wise and promise a decent return over time.

Creating a savings and investment strategy can be beneficial for both you and your children so when they grow up they’ll be in a solid financial situation during their college years.

Here is advice on how to build a savings plan for your children:

  • Open a savings account. This is the most basic option available to you. Savings accounts don’t have a high rate of return, but what they do offer is a safe place for you to put your child’s money over time. When opening an account, read the fine print about fees and minimum deposits, so you can choose something that works for you. The savings accounts available to you may actually vary from bank to bank, so look at a few different options before you settle on the best savings account for your child. Typically an online savings account will provide the highest interest rates.
  • Invest in a CD. A CD or Certificate of Deposit is a low risk, low return type of investment that typically locks your funds in place for a specific period of time. The term length you choose may impact the interest rate. You can choose the term length, usually as short as one month and as long as 5 years.
  • Invest in a College Savings Plan. Also known as a 529 plan, this is a tax-advantaged plan designed to encourage saving for higher education expenses. Growth on these accounts is tax-deferred, and, when needed, withdrawals may continue to be tax-free when applied to specific educational expenses. There are two different types of 529 college savings plans. The first is a prepaid tuition plan and the second is a savings plan. Each of these types have different basic mechanisms for use and are available in specific areas, so check with your state for what would work best for you. Prepaid tuition plans are available in 13 of the 50 states and allow for pre-purchase of the child’s tuition based on the current rates. They pay out when the beneficiary enters into college. Savings plans base your account earnings on the market performance of whatever underlying investments there are, such as mutual funds, for example. These plans are administered by the state and available in 49 of the 50 states and Washington D.C.
  • Utilize a custodial account. This is a savings account or certificate account held in a minor’s name. The interest is registered under the social security number of the child, though your name will be listed as the custodian for the account. With this type of account, you can transfer funds to the minor while still managing the account. Once the funds are deposited, they become the property of the minor and can only be used to benefit the minor. When the minor reaches legal age, funds are turned over to him or her.
  • These are just some of the options available to you for preparing for your child’s future. When you consider the costs associated with raising a child and sending him or her to college, it makes sense to put a plan into place as early as you possibly can.

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