3 Accounts You Should Set Up For Your Kids at Birth

Navigating today’s financial landscape, you might think setting up your kids for a wealthy future is a pipe dream reserved for the rich and famous. But what if I told you that turning your child into a millionaire is within reach, and no, you don’t need to start with a fortune?

It all boils down to smart planning and knowing where to put your money from the get-go. By opening these accounts for your kids early on, you’re not just saving for their financial future, but potentially unlocking the door to millionaire status. So, let’s dive into the types of accounts that can make a huge difference.

1. Custodial Roth IRA

One of the best places to invest your child’s earnings is in a custodial Roth IRA. This type of brokerage account is perfect for long-term savings, especially for kids with earned income. The beauty of a Roth IRA lies in its tax structure. Contributions are made with after-tax dollars, but the account’s growth and withdrawals are tax free under current laws.

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Let’s crunch some numbers: if you contribute the 2023 maximum of $6,500 yearly to your child’s Roth IRA, assuming a 7% annual return, this could grow to about $221,000 by their 18th birthday. Leave that untouched until they retire, and they could be looking at around $5 million. Plus, they can use $10,000 of it penalty free for their first home purchase. It’s an incredible way to leverage compound interest from a young age.

2. UTMA account

A Uniform Transfers to Minors Act (UTMA) account is another fantastic tool. This account type allows you to gift your child financial assets, like cash, real estate, or even fine art, without needing a guardian or trustee. A UTMA account offers tax advantages — the first $1,250 of unearned income is tax free and the next $1,250 is taxed at the child’s lower rate.

If you contribute a part of the remaining income, say $1,000 annually, into a UTMA account with an assumed 7% growth rate, you could see this investment grow to about $34,000 by the time your child is 18. If allowed to mature, it could surpass $800,000 by retirement. It’s an excellent way to diversify your child’s investment portfolio from an early age.

3. 529 college savings plan

In addition to the custodial Roth IRA and UTMA account, a 529 college savings plan is essential to consider setting up for your child at birth. This account can help you save for your child’s future education expenses, including tuition, room and board, and even books and supplies, at any accredited college, university, or vocational school.

The best part of a 529 plan is its tax advantages; all of your contributions grow tax free. Plus, withdrawals used for qualified education expenses are not taxed. Depending on which state you live in, you might even get tax deductions or credits for 529 contributions, so there’s even more of a financial incentive.

Let’s explore the advantages:

  • Tax benefits: The primary draw of a 529 college savings plan is the tax-free growth and withdrawals, provided funds are used for qualified education expenses. This feature allows your investments to grow more efficiently over time.
  • High contribution limits: 529 plans have high contribution limits, often over $300,000 per beneficiary, allowing for substantial savings potential.
  • Flexibility: If your child decides not to go to college, you can change the beneficiary to another family member without penalty. Plus, with the expansion of qualified education expenses, 529 plans can now be used for K-12 tuition and apprenticeship programs.
  • State incentives: Many states offer tax deductions or credits for contributions, potentially lowering your state tax bill.

Starting early with a 529 plan allows your contributions to compound over time, significantly reducing the burden of higher education expenses. While it’s hard to predict whether your child will attend college or pursue another path, the 529 plan’s flexibility and tax advantages make it a wise choice for saving for their future.

By employing these strategies, you’re doing much more than saving money for your child; you’re setting them on a path to financial independence and, potentially, millionaire status. The journey to securing your child’s financial future begins with these steps, and the earlier you start, the better their prospects.

It’s always a good idea to consult with a financial advisor or tax professional. They can offer personalized advice to ensure these strategies are optimally tailored to your and your child’s specific circumstances.

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