How To Save Money For Your Kids
Many of my clients with kids desire to save for them. This is a great idea and I agree that it should be done!
Most parents currently save money in a few different places. Just a few decades it was savings bonds and CD’s. But as banks began paying less and less interest, parents moved in to the stock market.
Today parents use tools like the Coverdell ESA, 529 plan, and UGMA/UTMA accounts. Some parents still use the bank, but a large percentage have moved into the new college savings alternatives.
But let me ask you, what is your plan if your child doesn’t want to go to college? Or what if they get scholarships and grants? What if they decided to go into business instead? These savings vehicles are very short sighted and there are a few issues that you may want to be aware of before putting your children’s money into them.
Coverdell ESA. Established in 1997 as part of the tax payer relief act, the Coverdell was initially an education IRA. It was later changed to an ESA instead. The first issue is contribution limits. Each child can only receive $2000 per year contributions to their account. The money ends up in the hands of Wall Street. Your child must use the money by age 30 or you have to either cash the account out and pay the taxes or transfer it to a younger child, so that your child gets nothing. Doesn’t sound ideal does it? Not only that, but the plan can only be used for qualified educational expenses. Which means your child is cornered into using the money for the sake of using the money, instead of doing what is truly best for them.
529 Plan. This plan was established in 1996 and is a state specific plan. This plan has contribution limits that are undefined by the IRS, so the gift tax exclusion applies. Although this is not widely advertised. This is $15,000 for individuals and $30,000 for families. There is also a 5 year limit and a lifetime limit. This means that if you contribute over the applicable amount on behalf of your child, your excess contributions will be taxed at a rate of 40%. Additionally, if withdraws are used for expenses other than qualified education expenses are taxed as income. If the assets are not used they can be transferred to another qualified person in your family, but then your child gets nothing. If you withdraw it for your child because they didn’t go to school, you will pay income tax on all of the growth. Also, these plans can only be invested in mutual funds and because they are only state level plans, the funds do not need to disclose their fees. And finally, this is also an education specific account, limiting your child to having to go to college just because they have to spend the funds or lose them.
UGMA/UTMA. This is essentially a savings trust account. There are no tax benefits. You are investing for the benefit of your child and at age 18 or age 21. It cannot be transferred or gifted to someone else. The growth of the funds will be taxed as income and you are still investing in mutual funds and paying mutual fund fees. Now, the dangerous part of this is that when the child is of age, the account goes to them. Period. If they’re 18 and that was the agreed upon age, you are giving them 100% control of all the funds with no restrictions or specified use. I don’t know about you, but when I was 18 that would not have been a good idea.
So what are our options? Lock the money up with Wall Street and the IRS and hope your kids go to college so that you don’t have to pay taxes?
Or you can invest a bunch of money with Wall Street, pay regular income taxes, and then just give it to your child and hope they do something smart with it when they are of age?
Let’s be real, these are not wise ways to plan for the future.
What’s the alternative?
Well, I want to introduce you to a concept called The Sacred Account Jr.
This is a high early cash value dividend paying whole life insurance policy that you own for the benefit of your child. The money can never be lost, there are no fees, the money does not go to Wall Street, the IRS cannot touch it, and it grows tax free. Your child can use the money for anything as long as you give them permission. Which means it can be used for their first home, higher education, a vehicle, wedding costs, investing, or even held until retirement where they can convert it into a pension. And if they aren’t in a position where you’d trust them with the money yet, that’s no problem. You can keep it, tax free, until they are ready.
We need to stop falling for the tricks put out by banks, wall street, and the IRS. This account has been around for over 160 years and has never once lost money. There is literally no other savings plan that can claim that.
If you’d like to learn more about The Sacred Account Jr. click here.
Own Your Potential,
CEO & Founder of Wealth DynamX
Jerry Fetta helps his clients gain more financial knowledge, make more money, keep more of it, and multiply what they keep.
If you feel like one or more of these areas is costing you money and opportunity right now, then get more information about Jerry Fetta and Wealth DynamX by going to www.WealthDynamX.com/contact