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Saving for Your Child’s Future: A Comprehensive Guide

Setting aside money for your children can pave the way for their financial success as adults. By starting early and saving regularly, even small amounts can accumulate into a significant sum that can be gifted to your child when they are older. There are various account types to consider, each with its own benefits and drawbacks. Here, we explore six account types that can help you build a financially secure future for your child.

1. High-Yield Savings or Money Market Account

When you’re ready to move beyond the piggy bank, a high-yield savings account (HYSA) or a money market account can be excellent options. These accounts offer higher interest rates than traditional savings accounts and can be easily opened at your local bank, credit union, or online. They are insured for up to $250,000 per person, per account type, making them a safe place to stash cash.

However, one downside is that the interest earned may not always outpace inflation. Additionally, some institutions limit the number of transfers or withdrawals you can make each month, so these accounts may not be ideal for regular use.

2. Certificate of Deposit (CD)

A certificate of deposit (CD) is a type of savings account where you make a single lump sum deposit and leave your money in the account for a predetermined term. CDs typically offer higher yields than traditional savings accounts because you agree not to withdraw your money for a set period. However, if you need to access the funds before the term ends, you may have to pay a penalty.

CDs are generally insured for up to $250,000 per person, per account type, making them a secure option for short- or mid-term savings goals.

3. UTMA or UGMA Account

Custodial accounts under the Uniform Gifts for Minors Act (UGMA) or Uniform Transfers for Minors Act (UTMA) allow you to transfer various assets, including securities, real estate, and more, into an account in your child’s name. These accounts are taxable, and all contributions are irrevocable and must be used for your child’s benefit.

While these accounts offer the potential for higher returns, they can significantly impact need-based financial aid for college.

4. 529 Plan

A 529 plan is an investment account designed to help parents save for college. Funds can be used for various educational expenses, and contributions may be tax-deductible in some states. Withdrawals for qualifying education expenses are not subject to federal income taxes.

However, returns are not guaranteed, and contributions are subject to market losses. Additionally, 529 funds must be reported in your child’s Free Application for Federal Student Aid (FAFSA) calculation, which may affect their eligibility for need-based financial assistance.

5. Trust

Trusts are legal agreements that dictate how the assets you put into the trust will be distributed. They can be expensive to set up and usually require an attorney, making them best suited for larger sums of money. Trusts offer flexibility in how and when your child can use the money, and different types of trusts can be tailored to your child’s needs.

6. ABLE Account

ABLE accounts are tax-free savings accounts for children with special needs. These accounts can be used to pay for disability-related expenses and do not affect your child’s eligibility for government assistance. Contributions are not tax-deductible, but investments grow tax-deferred, and withdrawals for eligible expenses are not taxed.

Preparing for the Future

Saving for your child’s future is a great way to help them get off to a solid financial start. However, it’s equally important to teach them how to save, budget, and manage money on their own. Modeling healthy saving and spending habits, answering their money questions, and teaching them about investing and compound interest can help your child avoid common financial setbacks.

At O1ne Mortgage, we understand the importance of financial planning for your family’s future. Whether you’re looking to save for your child’s education or need assistance with mortgage services, we’re here to help. Call us today at 213-732-3074 to discuss your mortgage needs and how we can assist you in achieving your financial goals.

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