Saving for you (Future) Child

Savings for your current child or future child needs to be a big goal for you and your family. I found this amazing, but a recent government study found that it can take over $235,000 to raise a child from infancy to age 17. In fact that number does not include college, extracurricular activities, or family vacations. Now that you know its going to cost a lot to provide for a child, I wanted to lay out some helpful tips on how to save for your current or future child.

The first, and most important thing to do is take care of your own future first. You have to make sure you and your spouse are taken care of in the best way possible before you can start saving for your child. There are a few key steps to do. The first thing is to set up a will, which I have talked about in a previous post. The second thing to do is to get term life insurance. Term life insurance doesn’t cost much, and it can save your family in a tragedy. The last thing to do is to save for retirement.  Pay off all debts (except your home) and try to save at least 15% of your income.

Now that you have taken care of yourself, it is now time to save for your child. The first item to look into is saving for your child’s college education. College tuition could cost over $200,000 for four years, and some are speculating it could go as high as $500,000. 

• I would first look into 529 plans, which are state-run. The biggest advantages are:
• They are hands off, where the state invests your money and you can sign up for automatic payments.
• Tax advantages: As long as you spend the money on specific college-related expenses such as tuition, fees, course materials, you won’t have to pay for the gains in the 529 plan.
• There are very high limits on your contribution amount before paying a gift tax.
• You can switch to a different beneficiary if your child decides to not go to college or better yet, gets a scholarship.
• It has little impact on financial aid given it is considered your assets, not your child’s assets.

The biggest disadvantages are:

• You do not have control on your investments. For the most part someone else is managing your money, and you can usually only make changes once a year.
• There are some costs to each program so you should look how much they charge you.

If a 529 plan is not for you, I would then look into a Coverdell education savings account (ESAs). The biggest advantages are:

• Tax advantages: As long as you spend the money on specific college-related expenses such as tuition, fees, course materials, you can avoid paying taxes on the gains.
• Investment control: You can invest the money any way you prefer giving you more control and making changes more often.
• You can also use the money for elementary and high school tuition, after-school programs, textbooks, and even tutoring.
• You can switch to a different beneficiary if your child decides to not go to college or better yet, gets a scholarship.
• It has little impact on financial aid given it is considered your assets, not your child’s assets.

The biggest disadvantages are:

• You can only deposit $2,000 per child per year
• There is an income threshold: If your annual “modified adjusted gross income” (shown on your tax return) is more than $110,000 (for an individual) or $220,000 (if you file a joint return), you are unable to contribute to the program.
• Time limit: You can only contribute while the child is under 18, and you have to use the money by they are 30.

Overall, as long you as are saving money for your child, you are going in the right direction. There are so many joys of raising a child, but the reality is you also need to think about how you are going to pay for a child! Please let me know if you have any additional questions on tips to save for your child.