![]() Though they’re traditionally thought of as an investment option for working adults, Individual Retirement Accounts (IRAs) are technically available to anyone with an earned income. Parents who plan on sending their children to college, trade school and/or private school. As long as they’re used for educational expenses, 529 accounts offer tax-free growth (meaning your investment returns and growth aren’t taxed), and certain states may allow you to deduct contributions from your taxes. Offerings are typically limited to a selection of target-date funds (a mutual fund created to automatically shift your portfolio mix as you age) or investment mixes.īut they do provide certain tax benefits that custodial accounts don’t. Unlike custodial brokerage accounts, parents retain control of 529 accounts and they can designate different beneficiaries, like siblings or even themselves, if funds go unused.ĥ29 accounts generally offer more limited investment options than custodial accounts. Try our compound interest calculator to see for yourself! And this gives your child’s college fund more time to grow (and benefit from the associated years of additional compounding). Not only does this let you contribute more without a penalty, but it also allows you to have more money invested for longer. While the definition of what counts as education has expanded to include colleges, universities, trade schools, private K-12 schools and $10,000 of student loans, it’s still not as flexible as the offerings of brokerage and custodial brokerage accounts, which can be used for any kind of expense.ĥ29 accounts are also subject to the same gift tax as custodial accounts, though a special provision allows a person to gift five years of contributions at once, provided they don’t make additional contributions for the next five years. You retain complete control and can decide when, if and how much you gift your children.ĥ29 accounts let you invest for your child’s education-and that’s about it. Parents who value ultimate flexibility and control. Married couples can give up to $30,000 a year per recipient before incurring a gift tax. That means you’d only be able to gift $15,000 of the investments you’ve held for them each year before you’d be subject to a gift tax. Keep in mind that gift tax rules still apply whenever you transfer assets to your child. Investments that you’ve held for longer than a year may be taxed at a lower capital gains tax rate, though. All increases in your account value-such as through dividend payments (which are small regular bonuses some companies or funds give shareholders as a thank you) or when you sell shares to withdraw money-will be taxed. ![]() There’s no maximum to the amount of money you can invest, but you also don’t get any real tax benefits. Money can be used for any kind of purchase or expense. These accounts give you full flexibility and broad investment options: You can invest in stocks, bonds, mutual funds and exchange-traded funds (ETFs) or predesigned diversified mixes, such as an Acorns account. You can invest for your child through a traditional brokerage account. Parents who want to give their children money they can use for any kind of expense once they’re adults. While the thought of a young adult gaining control of a potentially large sum of money can be intimidating, custodial accounts are a motivation for talking with your children about saving (such as creating a budget) and spending to establish good money habits early on. Check with a financial professional to determine if this situation applies to you.) (Some states may allow you to defer this transfer until even later. Depending on where you live, that could be 18 or 21. ![]() This means once money goes into your child’s account, you can’t take it out and spend it on anything that doesn’t directly benefit them, which could include anything from clothes to tuition expenses.īecause the assets are legally your child’s, that also means that they assume legal control as soon as they reach your state’s age of majority. All assets are held in your child’s name-irrevocably. Gift tax rules still apply to custodial accounts: You can’t give any child more than $15,000 per year ($30,000 with a spouse) before you incur a gift tax. You can choose to pick your own investments at a traditional brokerage or use precrafted diversified mixes, like those in Acorns’ portfolios. Here are options for investing in your child’s future.Ĭustodial brokerage accounts work a lot like accounts you use to invest for yourself. Investing money for them regularly early on can help you build up enough to give them a strong financial start as adults. As a parent, you want to do everything you can to set your kids up for success.
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