Mel's Monthly Money Tips: Child Savings Options

Child Savings Options

Custodial Account

This option is best for those who want to save money for their children but don’t want them to have access to the cash until they are adults. The money is held in the child’s name, but parents can deposit money and manage the account until the child reaches the age of majority. While custodial accounts don’t provide the same tax benefits as other college savings vehicles, they may be a good choice for parents who aren’t sure if their child will go to college or who want to provide a financial gift upon adulthood.

529 College Savings Plan

These accounts come with tax benefits, on a state level, and many plans feature low fees. Some states provide a tax deduction for contributions to their state’s 529 plan, and withdrawals used for qualified expenses are exempt from federal income tax. The ability to change beneficiaries on these accounts also makes them attractive.

Roth IRA

A parent may utilize a Roth IRA, by either naming themselves, or the child, as the account owner, if that owner has earned income. A Roth IRA allows people to save after-tax dollars. The flexibility with a Roth comes from the fact that the principal amount can be taken out at any time without tax or penalty. There are certain withdrawal rules for accessing the earnings in the account, but there are no penalties for using earnings to fund college expenses.

Trust Fund

A trust fund can be set up with any amount of money and offers more control over disbursements while protecting cash from creditors. It also ensures a child’s assets aren’t split during a divorce. An attorney is needed to draw up the trust documents, and someone must be appointed to manage the money.