Building Wealth from the Start: The Best Accounts for Your Child’s Savings

As parents, we all want to give our kids a head start in life, especially when it comes to money. But where do you even begin? Should you stash their savings in a piggy bank, a Roth IRA, or a traditional IRA? Let’s break it down in simple terms to make it easy and fun for both you and your kids.

Start with the Basics: Account Types

Non-Qualified Accounts
Non-qualified accounts are the most straightforward option. You put in post-tax dollars and the gains are taxable. They don’t have contribution limits, so you can add as much as you want. Plus, the money is accessible whenever you need it. This makes them perfect for a tad longer-term goals for bigger purchase items or events in the future.

Roth IRA
The Roth IRA is like the superhero of savings accounts. You contribute post-tax dollars, but withdrawals are tax-free. This is ideal for long-term savings since you won’t pay taxes on the earnings when you pull the money out. The catch? Your kid needs to have earned income to qualify. Also, if they’re under 18 (or 21 in some states), you’ll need to set up a custodial Roth IRA.

Traditional IRA
The traditional IRA is another solid option, offering tax-deferred growth. You can contribute pre-tax or post-tax dollars, but the withdrawals are taxed. This type of account is great for long-term savings with the added benefit of potential tax deductions. Just remember, if you need to withdraw funds before age 59½, you might face penalties.

Time Horizon and Liquidity

Think about when your child will need the money. If they have short-term goals, like buying a new bike or saving for a summer camp, liquidity is key. Non-qualified accounts are perfect here since they allow easy access to funds without penalties.

For long-term goals, like college tuition or even retirement (hey, it’s never too early), Roth IRAs and traditional IRAs are the way to go. Maybe even their 529 plan too! They offer significant tax advantages and the magic of compound growth over time.

Engaging Your Kids

Turn saving into a family activity. Use online tools and apps to make learning about saving fun. Regularly discuss their savings progress and set new goals together. Consider matching their contributions to give them extra motivation. For example, if your child saves $20 from their allowance, you could match it with another $20. This not only boosts their savings but also teaches the value of long-term investing.

Get Started Today

Don’t let the complexity of different account types hold you back. Start small, stay consistent, and involve your kids in the process. Remember, it’s not just about the money. It’s about teaching them financial responsibility and independence.

For more tips and resources on saving and financial literacy, visit www.totalcents.com. Let’s shape a generation of financially savvy kids, one savings account at a time!