Planning for a new child is one of the most exciting times in people's lives. But with a great bundle of joy comes the tremendous financial responsibility of raising a young one. The good news is that for parents, there are a few ways to ease the burden of later financial concerns. Here are four ways to invest in children from birth.
1. Open a College Savings Plan
A 529 college savings plan is an excellent option for families that plan to send their children to college down the road. With rising college tuition costs, it's virtually unknown what the price tag might be in another 18 years. That's why it's critical to begin saving as soon as possible.
The benefits of using a 529 plan are many, including:
Contributions are tax-deductible in some states
Investments within the 529 plan grow tax-free
Withdrawals are tax-free as long as they're used for qualifying educational expenses
Any family member or friend can contribute
2. Consider Permanent Life Insurance
Many parents choose not to think about child life insurance because it means thinking about the unimaginable happening to their baby. But opening a permanent or whole life insurance policy for a new child is a form of protection for his or her future. As long as the insurance remains active, coverage is for life. In addition, the policy will build cash value that's guaranteed to grow over time and will be available to the child to access during their life (although doing so will reduce their death benefit).
3. Look at Setting Up a Trust
After establishing a trust, which is a legal tool that can hold assets for kids, parents and other family members can put in assets that a child will be able to access at a certain age. Trusts provide parents with the authority to decide who gets access to the assets and when. For example, parents can decide if children will receive a lump-sum payment or smaller monthly or yearly payments over a set period.
4. Consider a Low-Risk Custodial Savings Account
A custodial account allows adults to save for kids while also maintaining control of the funds until the child reaches the age of majority, which is 21 in most states. The major benefits of custodial accounts are that there are no income or contribution limits and no penalties for withdrawing funds at any time. But it's always good to be cautious of gift tax rules that may come into play with an annual gift larger than $15,000.
The Bottom Line
There's no better gift to give children than that of financial education and stability. And investing in children from birth is a smart move because of the long runway money has to grow before kids need to use it. Consider investments in college savings plans, whole life insurance, trusts or custodial savings accounts. These tools can provide a jump-start for kids as they grow up and enter the adult world.
Tags: family finance, insurance, personal finance, savings, life
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