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Helping Your Kids Get a Financial Head Start

Millenials and Roth IRAs_ A Perfect Long-Term Marriage

If you had invested $6,000 into an account in the name of your newborn child, invested $416 every month and received an average 10% rate of return, at age 30, your kid would have just over $1 million in the bank. Even if this example is not practical for your personal situation, it does a great job illustrating the main point.

Continuing our theme from our last post, where we talked about motivating millennials to save money for the future, in this post we’re talking about creating savings for young children, even infants.

Think of the benefits of this strategy: paying their school tuition, room and board in full, giving them a massive head start for a secure retirement future. On the other hand, it can provide the capital to start their own business while still very young. The key is to begin as early as possible and to allow compound interest and monthly savings to work for you.

Let’s make the assumption that you and your children should not depend on any governmental plans for education debt forgiveness. With this being today’s reality, enabling your children to have a clean financial slate after college graduation is a huge advantage (both from a financial and stress perspective).

If you are interested in finding out more, the financial advisers at Isakov Planning Group can educate you about the options, and discuss what might be the best path for your family. However, here are a couple of important options to help your money grow for your children’s future.

Education Savings Account. An education savings account (ESA), also known as a Coverdell Savings Account, is very similar to an IRA, but with tighter limits on annual contributions. You must earn less than $220,000 as a married couple (< $110,000 for a single parent) to qualify, and you can invest only up to $2,000 a year per child.

529 Plan. A 529 Plan is an important option if you want to invest more each year. It can also provide a state tax deduction (depending on your state of residence), and allows money to be used on qualified educational expenses (e.g., tuition, books and fees). If the child does not go to college, the money in the account can still be used for (1) other children, (2) other uses like noncollege education, or (3) reverts back to you.

Savings or Brokerage Accounts. Although you won’t receive any tax breaks with these accounts, they do provide the most control over the funds that accumulate, and without any limits on contributions or withdrawals. These can be set up as custodial accounts in the child’s name, where you have control over the account until the child reaches a certain age. Since the account would be in your child’s name, taxes would be calculated based on their taxable earnings, which is likely far lower than yours.

We must point out a major caveat to the overall approach summarized in this article: Don’t use this strategy for your children’s savings if you haven’t secured your own financial future! That means paying off your own nonmortgage debt first and having a strong retirement income plan. If you don’t and you put away money for your kids, you may be asking them later on to spend these accumulated savings on you (not themselves)!

If you are interested in giving your children a financial head start, talk to us at Isakov Planning Group. We will cover all the options and answer any questions you may have.

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Isakov Planning Group brings industry leading resources and expertise to help our clients pursue and achieve their financial goals.