Top 3 Accounts to Use to Build Wealth for Your Kids

Ensuring your child's financial well-being in the future is crucial for their overall success. By starting early and utilizing the right accounts, you can set them on a path toward financial freedom. In this article, we will explore the top three accounts that you can use to build wealth for your kids. From college savings to investment accounts, these options offer different advantages tailored to meet your child's long-term financial goals.

As parents, it's natural to want the best for our kids. By investing in their future, we provide them with opportunities that can pave the way for financial stability. When it comes to building wealth for our kids, there are several accounts worth considering.

1. 529 College Savings Plan

A 529 college savings plan is a tax-advantaged investment account specifically designed to save for future education expenses. These plans are offered by states and educational institutions and come with a range of benefits. Contributions to a 529 plan grow tax-free, and withdrawals used for qualified education expenses are also tax-free.

Opening a 529 college savings plan for your child allows you to invest funds that can grow over time, ensuring that they have the necessary resources when it comes time to go to college. The flexibility and tax advantages make 529 plans an excellent choice for building wealth and funding your child’s educational future.

Editor’s Note: in my opinion, these plans would ideally be started by a grandparent or family member. I love these accounts because they have the ability to grow quickly, for the long-term and provide financial backing for your child’s education. The major drawback - if funds are not used for educational purposes, you will get penalized. In my mind, as a parent, I want my kids’ money to have a little bit more freedom than that! With my own kids, we contribute to savings accounts first and college savings second. Again, if a grandparent or family member is willing to contribute to one of these accounts for your kiddos, and your kids can have both, savings and college funds growing strongly, that’s an ideal situation!!

2. Custodial Savings Account

A custodial savings account is a bank account that is held in the name of a minor but managed by a parent or guardian. It provides a simple and accessible way to save and grow your child's wealth. As the custodian, you have control over the account until your child reaches the age of 18.

Custodial savings accounts often offer competitive interest rates and can be opened at most banks or credit unions. They provide a valuable tool for teaching your child about finances and the importance of saving. By starting early and regularly contributing to a custodial savings account, you can instill good financial habits and set your child on a path toward long-term wealth accumulation. The best type of savings account to use is a high-interest savings account. Money can sit in a high-interest account and earn close to 5% APY currently. These accounts are not invested so the money is quickly accessible but still earning income. We love that! This is a great place to ‘park’ savings money until it is ready to be invested.

3. Roth IRA for Kids

While retirement may seem like a distant concept for your child, opening a Roth IRA (Individual Retirement Account) early on can be a game-changer for their financial future. A Roth IRA is a tax-advantaged account that allows contributions to grow tax-free. Unlike traditional IRAs, withdrawals from a Roth IRA in retirement are also tax-free.

As long as your child has an earned income they qualify for one of these accounts and by contributing to a Roth IRA for your child, you give them a head start on retirement savings. The power of compounding can work wonders over several decades, enabling your child to amass significant wealth over time. Additionally, the contributions made to a Roth IRA can be withdrawn penalty-free for qualified education expenses, making it a versatile account that provides flexibility for your child's future.

Conclusion

Investing in your child's financial future is a proactive step that can have a profound impact on their life. By utilizing the right accounts, you can build wealth and set your child on a path toward long-term financial success.

So, here is your action step: 
1. Click the link below to see the Top Rated High-Interest Savings Accounts for 2023 by Nerd Wallet.
https://tinyurl.com/mr7e8k8u
2. Pick one that works for you and then wrangle the kids and let them watch you open an account for them. Let them help if they can!
3. Contribute to the account using their savings and you will have made an AWESOME step toward building financial freedom for your kids!

Here are some FAQs that ChatGPT thought may help!

Q1: When should I start investing in these accounts for my child? It's best to start as early as possible. The power of compounding works best when you have more time on your side. The earlier you start, the more your investments can grow over time.

Q2: Can I contribute to multiple accounts for my child? Yes, you can contribute to multiple accounts for your child. It allows you to diversify their investments and take advantage of the benefits offered by different accounts.

Q3: Are there any income limits for opening a Roth IRA for my child? No, there are no income limits for opening a Roth IRA for your child. As long as your child has earned income, they are eligible to contribute to a Roth IRA.

Q4: What happens to the money in a custodial savings account when my child turns 18? When your child reaches the age of majority, typically 18 or 21 depending on the state, they gain control of the account. They can decide how to manage the funds and use them for their financial needs.

Q5: Can the funds in a 529 college savings plan be used for expenses other than education? While the primary purpose of a 529 plan is to save for education expenses, you can use the funds for other purposes. However, non-qualified withdrawals may be subject to taxes and penalties

Go open that account!

Amanda