The holidays are just a few months away and some people may already be thinking of what to get the little ones in your family, perhaps the latest toys on the market.
Have you considered creating a savings account that your entire family can contribute into?
“You can open up a savings account for a baby once they have a social security number. A parent, a grandparent should be able to go to their financial institution and open an account,” said Kim Chapman, Financial Wellness Director at Neighbors Federal Credit Union.
So instead of overloading a child with gifts they’ll likely use a few times or buying repeat toys, set them up early with something they can use throughout their childhood.
“There’s college. There’s that first car. There’s even before college, they may have needs and so it’s a good idea to start start small $10, $15 a pay period, and of course as they get older, you can expand and you can add to that and that little bit of savings that’s earning interest, it grows over time,” Chapman explained.
Interest rates will vary depending on your bank.
There are traditional savings accounts, but there are also specific accounts just for education purposes, such as the 529 savings. A parent or grandparent can open the account and they are the owner of it, but the child is the beneficiary.
“Ideally, not only does the parent contribute to it, but you have those aunts and uncles that love to give the kids the money, right? So instead of them blowing it all on toys, they can actually make contributions to this 529 savings account, and it’s growing over time. When they get to age 18, they’ve got a nice chunk of money that may eliminate or minimize their need to get student loans,” Chapman went to explain.
Plus, a 529 is a tax deferred account but you may need to pay taxes on the interest earned. Although it’s meant to save until the child turns 18, there is not a time constraint on when you can use the money. As long as it’s used for educational purposes for the child, such as their tuition for a private schools, books, band, etc…you have access to that account without penalties.
But what happens if after all that time, your child decides they don’t want to go to college?
“With that 529 plan, there are some provisions to where you can basically move or transfer that money to another family member,” Chapman added. “It could be a down payment for that first home, so that they can leave the nest and be on their own.”
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