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Published on: 08/15/2023 • 5 min read

What You Need To Know About Saving for Your Child’s Future

One of the most important things that a parent can do is ensure that they’ve made the right choices in saving for their child’s future and have set them up for a lifetime of prosperity and success — but what is the best way to put money away for your children?

While there are numerous popular methods for saving for your child’s future, not every method will be right for every family. In this article, the experienced wealth managers at Avidian Wealth Solutions will talk about the unique advantages of these methods for saving, including 529 plans, irrevocable trusts, and custodial brokerage accounts.

If you are a high-net-worth head of household and are concerned that you aren’t doing as much as you can to save for your child’s future, contact Avidian Wealth Solutions today to schedule a conversation

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

While there is not one “best” way to save money for kids, there are enough differences between what these options can offer that should help make the decision-making easier — especially if you’re working with a trusted financial advisor. 

The basics of savings accounts and CDs

Opening your child a savings account is a basic yet essential step in saving for your child’s future. Because savings accounts offer high liquidity and essentially zero risk, they are a great option for putting away funds for the short term or for keeping a small stash of emergency funds. 

While even the best savings account for kids will still have very low-interest rates and growth rates, you can’t beat the ability to establish savings habits early, and the opportunity to teach your kids about how savings work in an incredibly low-risk environment. 

In the longer term, certificates of deposit (CDs) are a great option for saving for kids, as they offer a fixed interest rate and predetermined term. CDs are another great way to teach kids about the patience required for true fiscal responsibility and also provide a low-risk setting to do so. 

The power of 529 plans

529 plans are state-sponsored, tax-advantaged investment accounts that are specifically designed for education savings. They are an easy way for high-net-worth families to take advantage of tax benefits at the federal and state levels, as well as a few other benefits, including:

  • Contributions to 529 plans grow tax-free, and withdrawals from 529 accounts for qualified education spending (tuition, fees, room and board, books) are also tax-free.
  • Contributions are eligible for annual gift tax exclusions of $15,000 or $30,000 for couples giving jointly.
  • 529 plans offer incredible flexibility and control. The funds in a 529 account are transferable, so if your first child doesn’t empty the account, your second child can. 
  • There are no annual contribution limits. 
  • Because 529 plans are considered an asset of the account owner, they are unlikely to impact your child’s eligibility to receive grants and scholarships, saving you even more money. 

If you’re thinking of investing in a 529 plan in Texas, make sure to talk to your financial advisor about whether or not it will complement your existing financial infrastructure. 

Safeguarding assets with irrevocable trusts

Saving for your child’s future is often synonymous with ensuring that you have sufficient asset protection for your child’s future. As well as taking advantage of tax credits for education and making sure you are making the most of your money for your children, you need to make sure that you’re protecting it. Some benefits of setting up an asset protection trust fund for a child include: 

  • Risk reduction and asset protection from things like lawsuits, creditors, and market volatility. 
  • Minimization of estate taxes, as assets included in a trust are no longer considered part of a taxable estate. 
  • Control over the funds, when they are released, and who is in control of them. 

Keep in mind that irrevocable trusts are not easily modified. As you probably expected, we suggest collaborating with a trusted advisor who can make sure that the amount and type of trust(s) you establish align with your larger financial goals. 

The simplicity and flexibility of custodial brokerage accounts

Opening a UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account at a brokerage firm allows you to invest money on behalf of your children in an account that they cannot touch until they are 21 years old. 

Custodial accounts are easy to establish and allow you unparalleled flexibility in both how you invest your funds and how those funds are eventually used; you can use custodial accounts to invest in stocks, bonds, mutual funds, and more — and your child can use those funds on whatever they want once they are of age. 

This flexibility might be a negative for some parents, as contributions are considered irrevocable gifts, and once the child becomes of age, they have total control over the fund. Additionally, although custodial accounts are taxable*, a small portion of initial earnings ($1,250 in 2023) are exempt from federal taxes. 

*Continue reading about the capital gains tax in Texas

Ask Avidian Wealth Solutions about saving for your child’s future

Saving for your child’s future is a complicated prospect and an important step in creating a foundation for their sustained success. Each of the many options available comes with its own unique set of benefits and limitations and may or may not work harmoniously with your overall financial goals. 

Consider the entirety of your finances when making a decision about saving for your child’s future with Avidian Wealth Solutions. Avidian offers a boutique family office experience to high-net-worth families in Houston, Austin, Sugar Land, and The Woodlands, connecting and optimizing their financial life and taking a holistic approach to help them in achieving their goals.

Whether you’re looking for assistance managing multiple streams of income or help with facilitating the transferring of ownership of property from a parent to a child, Avidian Wealth Solutions can help. 

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