What is the best way to save for your child's future?

As a parent, you know that your child is bound to face all manner of difficulties as they reach adulthood, many of which they have to face on their own. Naturally, this doesn’t stop parents from trying to provide for their children’s future, and one of the best ways to do so is to set aside some money for the big expenses they’ll have one day, such as the cost of college tuition. However, saving up for those expenses can be very difficult, especially as the price tags for things like college continue to climb year after year, leaving many parents to wonder, “What is the best way to save for your child’s future?” To find out, keep reading as the experts at Sootchy explain.

Deciding on the best way to save for your child will ultimately be a personal choice, one that will rely heavily on your own goals. For some parents, saving will be a simple matter of setting aside as much money as possible before the child reaches adulthood, while other save with a particular objective in mind – covering the cost of higher education, for instance, or creating an investment portfolio that can keep providing returns for years to come. Below, we’ll look at some of the top savings plans for children and what makes each account so useful:

More often than not, a parent looking to save for their child’s future is doing so for the sake of providing the best possible education, and 529 plans are arguably the best tool for this purpose. Like some other savings accounts, 529 plans allow for investments into a variety of portfolios and generate earnings based on those investments, but they stand out because of their unique tax benefits.

When you contribute to a 529 plan, any returns on those contributions are entirely exempt from federal income tax and – in most cases – state income tax, so long as the funds are used for an appropriate education-related expense (called a “qualified distribution” in 529 plan parlance). Each state has its own plan, and you can choose from almost any one of them, anywhere in the country, when you start to save for your child’s future.

Both the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UGTA) allow for a particular type of custodial account that has become fairly popular with families looking to save for their child’s future. These accounts are technically considered the property of the child, but a custodian – typically a parent or relative – manages the funds until the child comes of age. The assets in these accounts can be liquid or they can take the form of stocks, bonds, and other investments, and they can be used for any purpose after the beneficiary takes control over the account.

A traditional savings account can make for an easy-to-use savings option, and they’re widely available at local banks around the country. Because savings accounts come with no restrictions on how the money is used, these accounts can offer a useful way of creating a pool of funds for virtually any purpose, but the drawback of traditional savings accounts is that they return very little interest on your initial deposit.

Although most people assume that trust funds are financial tools exclusively used by the rich, these accounts can actually benefit families on almost any point of the socioeconomic spectrum. The basic rules for a trust fund are these: A grantor – the person who sets up the account – creates rules for how and when the assets in an account can be used; these assets can be money, property, investments, etc. Should the grantor pass away, a trustee will continue to enforce those rules, then give the assets to the beneficiary – your child – when the proper conditions are met.

As mentioned above, the personal nature of saving money and planning for your child’s financial needs makes it impossible to generalize about the best way to save for your child’s future, but there are some helpful rules of thumb that can guide you to your top option.

For instance, you’ll want to ask yourself what kinds of returns you want to get out of the account, which also means you need to come up with an acceptable level of risk. A conventional savings account won’t earn you much – maybe 1% interest per year, if that – but it will keep your money secure; on the other hand, choosing a 529 plan can allow you to set up investments that provide greater returns – more than 10%, in some cases – in exchange for taking on more risk.

You’ll also need to consider how you want the money to be used. Trust funds can be created with unique conditions that limit the use of funds, while the money in a custodial account can be used however your child sees fit once they reach adulthood. This flexibility may be attractive to your child, but it means you can’t ensure the money is put toward a particular cause, such as college costs, so it’s an important factor to consider when choosing an account.

Committing to a savings plan for your child is an important step in preparing for their future, and 529 plans are one of the best options for achieving that goal. Open an education savings plan or prepaid tuition plan for your loved one today by downloading the Sootchy app or visiting us online.