When your child is a newborn, time is on your side to develop a strong savings plan. You have the opportunity over the course of the next 18 years to create strong growth for your child's money. A variety of savings options exist to suit your individual circumstances and goals. Use several approaches if possible to diversify your newborn's portfolio. College for a newborn may easily cost over six figures; the Bank of America recommends developing a solid savings strategy immediately.
Other People Are Reading
Bank Savings Account
This is the simplest way to save money for your newborn, according to Annie Mueller of Modern Mom. Basic savings accounts earn low interest but are no-risk, and the money is readily accessible.
Certificate of Deposit
A Certificate of Deposit (CD) is another low-risk form of investment for your newborn's savings. The interest earned on a CD is higher than a traditional savings account. You cannot access the money without penalties during the length of the CD. The time frame commonly varies from six months to 10 years---the longer the time invested, the greater the interest earned.
U.S. Savings Bonds
Savings bonds are another safe investment and are tax-free when used for qualifying educational expenses. Government-backed, these bonds tend to offer slightly higher levels of interest than a savings account. Bonds can be used as a buffer for more aggressive investments with your newborn's savings.
Section 529 Plans
Named for Internal Revenue Code 529, these government-sponsored education plans are federally tax-free. Financial companies operate these plans, and the options vary from state to state. Depending upon your state's available plans, the money invested may also be state tax-free when it is used for qualifying educational expenses. The plans allow you to create a custom portfolio or use established packages that allocate the money according to the child's age. When starting an account for a newborn, invest in a moderate to aggressive approach with the hopes of achieving high rates of interest. Over time, as the child approaches college age, modify the investments to a more conservative approach.
While mutual funds do not offer the tax benefits of a 529 plan, they do offer the same potentially high interest rates. Compared to investing in individual stocks, a mutual fund provides the advantage of being managed by professionals. Another possible benefit is that the money does not have to be used for educational expenses.
These accounts, created according to the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), are invested in a child's name and managed by an appointed adult until the child reaches adult age, which varies from 18 to 21 years, depending upon the state. Once the child reaches the adult age, the custodial account is terminated, and the money belongs solely to the child. One potential drawback is that the child will have complete control at a stage when parents may not feel he is ready, according to 360FinancialLiteracy.com.
The tax rates on custodial accounts vary. Some earnings are tax-free, while higher earnings may be taxed at the child's rate, then at the parent's rate. A custodial account offers the benefit of being flexible as to how the money is invested---stocks, bonds, mutual funds and even real estate. The money does not have to be used for educational purposes.
- 20 of the funniest online reviews ever
- 14 Biggest lies people tell in online dating sites
- Hilarious things Google thinks you're trying to search for