How to Save for Your Baby’s Future

fortpitt in Wealth Management 7 February, 2022

How to Save for Your Baby's Future

Written by: Emily Sippel, CFP® | Financial Advisor

Saving for your baby’s future is a brilliant and selfless act beneficial to both you and your child. Whether you want to save money for college, a car, or another one of life’s many milestones, investing in your child’s future starts the day they’re born. As a new parent, you have many different concerns and responsibilities, and money is likely one of them.

Saving for your child’s future gets confusing and can seem like a daunting task. If you’re wondering how to save for your baby’s future, then there is a wide range of options and tools available to get you started.

The Benefits of Starting to Save for Your Baby

Considering the financial responsibility of raising a child is stressful. If you’re a new parent, you may not have had time to entirely assess the benefits of saving money for their future. There are apparent benefits to saving money, but starting to save for your baby’s future right now has underlying advantages that you may not have considered.

  1. Put them in a position to succeed: If you begin saving now, you put your child in a better place to achieve financial goals. Saving for their education, for example, will offer them a way to graduate from college debt-free. This is an essential aspect of saving for their future, considering the rising costs of higher education.
  2. Ease the burden on yourself: Saving for your child’s future allows you the peace of mind of knowing that they’re taken care of when they reach adulthood. If you save for them now, you won’t have to spend money to support them later in life.
  3. Tax-free, pre-tax, and compound growth: Developing good saving habits does more than putting them in a better position as they get closer to leaving your house and going out on their own. You can invest in college savings plans, health savings plans, and other types of accounts using pre-taxed earnings. You can also add money into them that offers desirable compound interest rates and allows the investments you’ve made in your child’s future to grow exponentially.
  4. Financial independence: Saving for your baby’s future will set them up for life and offer them financial freedom as they reach adulthood. Give them the tools they need to live independently and not rely on others to pay for their living costs. You’ll also teach them the value of saving money starting at an early age, which can certainly set them up for a successful and healthy financial life.

These are just a few of the benefits of starting to save for your child’s future now. Other benefits include offering your child a way to help them realize their dreams and life goals. Develop a savings and investment plan for your child to give them a step up in life and provide them with the security of knowing they won’t have to worry about going into debt before even getting started in life.

How to Save for Your Baby’s Future: Types of Accounts

Understanding your options for saving and investing in your baby’s future is one of the first steps to getting started. There are several types of savings and investment accounts that you can open to get your child’s future secured. Opening college savings or retirement accounts to help ensure your child’s future is easier than you might think.

Children’s Savings Account

Children's Savings Account

A children’s savings account is just that, a savings account for children. Opening a children’s savings account teaches them about money management, the importance of saving money, and navigating and working with financial institutions, such as banks and credit unions. It’s essential that you thoroughly research different institutions and speak with your financial advisor before making a final decision, though. You don’t want to end up paying high maintenance fees for your child’s savings account, so conducting your research is vital.

You’ll want to look for a children’s savings account with these features:

  • No or low minimum balance requirements
  • No monthly or annual maintenance fees
  • Highest interest rates or yields available
  • Complimentary ATM or debit card so you can deposit freely

Most children’s savings accounts require a parent, grandparent, or legal guardian to open and manage them. Many financial institutions offer custodial accounts, which means you’re in charge of managing the funds until your baby reaches a certain age, usually 18.

529 College Savings Plan

A 529 college savings plan is an investment account designed to help pay for education. They offer many different tax advantages, such as tax-deferred growth and tax-free withdrawals when you’re using the money for qualifying educational expenses. 529 plans are provided in all 50 states, and they offer you a way to save for college or other education and tuition expenses by naming your child as the beneficiary.

One of the great benefits of most 529 plans is they are transferrable to other children and beneficiaries. You can open a 529 savings account, and if your child decides that college isn’t the best fit for them, you can transfer the money to another child to help pay for their education.

States take the money you invest in your 529 plan and things like mutual funds or US treasury bonds that help your investment grow. As long as you use the money for qualifying educational expenses, you will not have to pay state or federal taxes.

You can also open a 529 college savings plan in another state, and you aren’t restricted to the one in which you live. This gives you some early options as to where you’d like your baby to attend college. Thinking you’d already like them to attend college at your alma mater in a different state? You can open an account in that state and start saving for your child’s college education right away.

Prepaid Tuition Plan

Prepaid Tuition Plan

A prepaid tuition plan is a branch of  529 savings plans that offers you a way to prepay tuition at locked-in rates. Unlike the 529 plans, prepaid tuition plans are only provided by a certain number of states around the country. Most prepaid tuition plans are only applicable to specific predetermined colleges and universities, so you won’t have the freedom to choose which college you’re prepaying tuition for your child to attend.

Similar to 529 plans, you can choose to open an account in a state different from the one in which you live.

Coverdell Education Savings Account (ESA)

Formerly known as an education individual retirement account (IRA), a Coverdell education savings account (ESA) is a tax-deferred savings and trust account. An ESA allows you and other family members to contribute toward higher education, but the maximum limits are 2,000 dollars per year. That means the most you can contribute to the fund in a year is 2,000 dollars. The benefit to opening an ESA is that you can open multiple accounts in one beneficiary’s name, and any growth on these is tax-deferred.

You must use the money for qualifying educational expenses. Still, you can use it for any expense while your baby is in kindergarten through grade 12 and post-secondary schools. As long as the contributed distributions are less than all qualifying expenses such as tuition, books, supplies, and tutoring, you won’t have any penalties and they are tax-free.

Roth IRA

Opening a Roth IRA in your child’s name is an option to start saving for your child’s future. A Roth IRA is a custodial account, meaning that a parent or grandparent is in charge of management until your child reaches the appropriate age, which for a Roth IRA is 59 and one-half years old. Roth IRAs are great ways to get your child started saving for their retirement. There are limits as to how much you can contribute, though.

A Roth IRA is funded with money that you’ve already paid taxes on, and it’s a great option to consider if your child has a part-time job. You can start a Roth IRA for your child and contribute a maximum of 6,000 dollars per year, but that amount can always go up if the federal government decides. If the account is for your child, then there are stipulations. You can only contribute as much as they earn.

For example, if your child earns 1,000 dollars from mowing lawns or babysitting, then you can only contribute that 1,000 dollars to the Roth IRA that year. As a parent, you can match any contributions as long as your child has earned income. Roth IRAs are not typically used for saving for your child’s future, but given that the money isn’t meant to be withdrawn until they reach retirement age, you will be doing them a favor by getting them started now for retirement later.

Another advantage to Roth IRAs is that the money has already been taxed before contributing to the account. You can withdraw the funds in a Roth IRA at any time with a minor penalty, usually 10 percent, and you can use the money for anything, not just education.

Trust Fund

Trust Funds

A trust fund is a way for you to plan your estate and ensure your kids and other beneficiaries are taken care of in the event of your death. They establish a way for you to distribute assets, such as money and property, to a named beneficiary. There are three parties named in a trust fund:

Saving for your baby’s future sometimes starts with planning your estate and deciding how you’d like your assets to be distributed after you pass. Often, a trust can be set up in a matter of a few days, including your last will. This is something you should discuss with your financial advisor to determine the best course of action.

Saving for Your Baby’s Future FAQs

Well, that was a lot of information to take in, so you’re likely left with some questions about the saving process. Here are a few of the most frequently asked questions and answers to help guide you in the right direction.

Should I Prioritize Retirement Savings or Savings for my Child?

The first step to saving for your baby’s future is ensuring your future is secure. It’s essential to have an emergency fund and already be saving for your retirement before you start thinking about saving for your child’s education or their future.

Once you have an emergency fund established with enough money to cover at least six months’ worth of living expenses, then you can begin to save for retirement. After you have started saving for retirement, then you can begin to focus on saving for your child’s future.

What is the Best Investment Account for a Child?

The Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Child Act (UTCA) allows you to establish custodial accounts as investments for babies. These are funds that you can set up and create to buy stocks, bonds and invest in mutual funds on your child’s behalf. These are managed and funded without triggering a gift tax. Parents and grandparents can contribute up to $15,000 individually or $30,000 together on an annual basis without paying extra taxes.

While there is no singular best investment account for a child, your financial advisor can offer you personalized advice that’s best suited for your current financial situation.

How Much Should You be Saving for Your Child?

While there is no set amount of money you should be saving for your child, there are some general expenses that you’ll want to consider when setting up a savings plan for your child. If you’re thinking about college, one rule suggests saving at least 50 percent of the tuition costs. Of course, this depends on which university or college you’re hoping they will attend. Saving approximately $2,000 per year for every year leading up to college is a great starting point, but everyone’s situation is different.

How Can my Child Become a Millionaire?

You want to set your child up for success, and to most, that means helping them become a millionaire. Achieving millionaire status is more and more common in today’s world, though. Your child can become a millionaire before you know it by learning the value of money and starting to save money early by investing in accounts, such as 401Ks, IRAs, and mutual funds.

The power of compound interest helps your child’s money grow exponentially. Deciding the best long-term investment for your child is based on several factors, such as the amount of income they earn and their desired life goals.

Contact Fort Pitt Capital Group

Saving for your child’s future doesn’t have to be stressful and complicated. Take the mystery out of investing and schedule a meeting with one of Fort Pitt Capital Group’s financial professionals today.

Sit down and talk with one of our trusted finance professionals to help plan, fund, and secure your financial strategy. Our team has a passionate interest in helping you achieve the success you’re looking for.

About the Author:

Emily Sippel, CFP®
Financial Advisor
Fort Pitt Capital Group, LLC
680 Andersen Drive, Pittsburgh, PA 15220
(412) 921-1822 |

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