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Saving for Your Child’s Future: A Comprehensive Guide

Setting aside money for your children can pave the way for their financial success as adults. By starting early and saving regularly, even small amounts can accumulate into a significant sum. Here are six types of accounts that can help you build a secure financial future for your child.

1. High-Yield Savings or Money Market Account

When you’re ready to move beyond the piggy bank, a high-yield savings account (HYSA) or a money market account can be excellent options. These accounts offer higher interest rates than traditional savings accounts and are easy to manage. You can open them at your local bank, credit union, or online.

These accounts are insured up to $250,000 per person, per account type, making them a safe place to store your money. However, they may not always keep up with inflation, and some institutions limit the number of transfers or withdrawals you can make each month.

2. Certificate of Deposit (CD)

A certificate of deposit (CD) is a type of savings account where you deposit a lump sum for a fixed term. The money earns a guaranteed annual percentage yield (APY) for the term, protecting your investment if rates go down. However, if rates go up, you won’t benefit from the higher yields.

CDs typically offer higher yields than traditional savings accounts but come with penalties for early withdrawal. They are ideal for short- or mid-term savings goals when you don’t want to risk your initial deposit.

3. UTMA or UGMA Account

Custodial accounts under the Uniform Gifts for Minors Act (UGMA) or Uniform Transfers for Minors Act (UTMA) allow you to transfer various assets to your child. These accounts are taxable and must be used for your child’s benefit. The child gains control of the account upon reaching the age of majority in your state.

While these accounts offer potential for higher returns, they can significantly impact need-based financial aid for college.

4. 529 Plan

A 529 plan is an investment account designed to help parents save for college. Funds can be used for tuition, room and board, books, and other education-related expenses. Contributions may be tax-deductible in some states, and withdrawals for qualifying expenses are tax-free.

However, returns are not guaranteed, and contributions are subject to market risks. Unused funds can be rolled over into a Roth IRA, but using the money for non-education expenses incurs a tax penalty.

5. Trust

Trusts are legal agreements that dictate how assets will be distributed. They can be expensive to set up and usually require an attorney. Trusts offer more control over when and how your child can use the money compared to UTMAs or UGMAs.

Depending on your needs, you can set up revocable or irrevocable trusts, each with its own set of rules and benefits.

6. ABLE Account

ABLE accounts are tax-free savings accounts for children with special needs. These accounts can be used for disability-related expenses and do not affect eligibility for government assistance. Contributions grow tax-deferred, and withdrawals for eligible expenses are tax-free.

To be eligible, your child must have a qualifying disability before age 26. Contributions are capped at the gift tax exclusion amount, which is $18,000 annually in 2024.

Preparing for the Future

Saving for your child’s future is a great way to give them a solid financial start. However, it’s equally important to teach them how to manage money. Modeling healthy saving and spending habits, answering their money questions, and teaching them about investing can help them avoid common financial pitfalls.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. We’re here to help you secure a brighter financial future for your family.

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