savings for children

Many parents want to build some sort of financial cushion for when their child moves out of the nest and is confronted with the big bills (like textbooks, college tuition, first apartment, down payment on their first home, etc.). Opening up an account seems like the next logical step after piggy banks and allowance money in a child’s money evolution, whether they are part of the savings process or not. However, it might be difficult to come up with funds for your own savings or retirement accounts, let alone one for your child.

Opening up an account seems like the next logical step after piggy banks and allowance money in a child’s money evolution. Click To Tweet

I’d like to introduce you to two different accounts to further your financial goals for your children. Each of these accounts have financial benefits and take very little, if any, of your money to open.

Custodial Savings Account with Tax Advantages

Anyone, including friends and relatives, can open and contribute to a custodial savings account for a minor. You just need the child’s social security number in order to open the account. Unlike a 529 college savings plan account, the money accumulated in custodial savings accounts can be used for anything that benefits the child, and becomes the child’s either at the age of 18 or 21 (depending on your state laws).

There is no limit to how much you and relatives/friends can put into your child's account; however, a custodial savings account is only tax exempt up to $14,000 each year.

Custodial savings account earnings are taxed under what's called the “Kiddie Tax” rule (cute, eh?). For children under the age of 19 (or under the age of 24 if they are full-time students), the first $1,000 in account earnings can be taken as a standard deduction.

Earnings of more than $2,000 are taxed at the higher of these two: the parents' top marginal tax rate, or the child's rate.

Check out my four suggestions for how to fund and use one:

  1. Make Monetary Gifts Add Up: Use monetary gifts starting from birth through to the teenager years to fund the account. If you wish to let your teenager have some spending money from monetary gifts they receive, split it with them and take the opportunity to explain the need to save for their future.
  2. Make an Amish-Type Arrangement: Open an account for tweens and teenagers to deposit part of their paychecks from after-school/weekend jobs, or extra chores they do around the house.
  3. Use it as a Surprise Graduation Gift: Open an account for your niece/nephew/grandchildren and surprise them when they graduate high school.
  4. Use it in Connection with Allowance Savings Rules: Use the account to have your child save part of their allowance each week or month in order to teach them about saving for the future and dealing with different priorities.

Free Savings for College Paid for By Businesses

When I was in college I wanted to give my niece a Christmas present, but didn’t have any money. On top of this, I didn’t want to give just another toy or gift that would only last a year or so. So I found an awesome company called UPromise where you open up a free higher education savings account for someone (or yourself) and link your store loyalty cards and credit cards to it (if you want to boost savings, link your relatives’ store loyalty and credit cards as well!). Whenever you spend money at any number of retailers/restaurants/etc., then a certain percentage of the purchase is automatically deposited into their college fund. So far I’ve accumulated $182.22 for my niece in free college money—not a dime out of my pocket that I was not already going to spend anyway!

It was all free money that if I had not registered, I would not have for her. Also, once the account reaches a certain amount (I believe $250), you can invest it. She is only 10 years old, so in eight years, I hope to have between $500-$1,000 in free money to give her for her textbooks, computer, semester fees, or whatever other college expenses she deems necessary in her first year.

Once again, the account beneficiary can change at anytime, so if the person who is on the account decides to not to go college, then you can change the name and you will not lose the accumulated money. This is a win-win situation!

The sooner that you open accounts such as these, the more money you can potentially accumulate for your child’s future financial needs. So why not look into one today?

Other Articles You May Enjoy:

Saving Money for Your Child’s Future: A Different View
Legacy Gifts Will Last Longer and have More Meaning than Store Bought Gifts

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Amanda L. Grossman is a Certified Financial Education Instructor, Plutus Foundation Grant Recipient, and founder of Frugal Confessions. Over the last 10 years, her money work helping people with how to save money and how to manage money has been featured in Kiplinger, Washington Post, U.S. News & World Report, Business Insider, LifeHacker, Woman's World, Woman's Day, ABC 13 Houston, Keybank, and more. Read more here.