Dr. Mercy Otieno, Ph.D. Economics and Finance
© International Foundation for World Freedom
As a parent/guardian, it is never too early nor late to start thinking of your children's financial future. We can do it in different ways, iincluding:
1. Have a conversation with your kids about money and finances.
Knowledge about finances as money is the best you can give your kids, as this is not taught well in school. Conversations about finances should include money management skills such as budgeting, time value of money, managing credit, savings, and planning for retirement. These should focus on financial literacy of your children.
2. Getting a part-time job
Helping children get a part-time job (Check state regulations on minor employment requirements and restrictions) and save their earnings for the future. A part-time job will also help them gain financial independence by using their earnings to pay for their expenses and needs. Part-time jobs for teenagers include working in coffee shops, movie theaters, amusement parks, mowing lawns, babysitting, and pet sitting.
3. Set up a life insurance
Most households face financial struggles when the head of the family passes away. This way lump sum is paid to your beneficiaries when you pass away. Life insurance is cheaper when one is young and healthy and expensive as you get older. It is advisable to get one as soon as you can.
4. Save and invest for your retirement.
By saving for retirement, you remove the burden of your children taking care of you financially in old age. While the government provides social security funds, the average social security benefit is meager to live by at retirement. It is to explore other options like 401K if your employer provides for it. The earlier you start investing more time you have for your money to grow.
Currently, different accounts and options available to secure your child's future. These are:
Setting up a custodial retirement account
If your child earns income you can set up a custodial retirement account. This account is An IRA (IRA is a retirement account that earns you money, however, you only pay taxes when you withdraw the money) in a minors name (a minor who earns income) with the funds managed by the parents/guardian until they turn 18 years or 25 in some states. Your child will not be able to make any withdrawals from these accounts until they reach retirement age.
This is a long-term financial decision, and many options available for parents willing to pursue, such as:
2. A custodial Brokerage account
If your child does not have any taxable income, you can set up a custodial brokerage account. This can be established under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act. The account is originally set up in the parent or guardian's name and transferred to the child's name when they turn 18 or 21 years of age, this varies per state.
You need to look for a broker that does not charge fees for or have a minimum deposit amount for custodial accounts. You then need to teach your kids about investing as they grow older, many brokers have tutorials and education materials on trading.
One can withdraw money from these accounts, however, the funds must be for purposes of the welfare and needs of the child. As a custodian, you cannot withdraw money from a custodial brokerage account to pay your bills and living expenses or emergencies.
2. A custodial Brokerage account
If your child does not have any taxable income, you can set up a custodial brokerage account. This can be established under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act. The account is originally set up in the parent or guardian's name and transferred to the child's name when they turn 18 or 21 years of age, this varies per state.
You need to find a broker that does not charge fees or have a minimum deposit amount for custodial accounts. You then need to teach your kids about investing as they grow older Many brokers have tutorials and education materials on trading.
One can withdraw money from these accounts, however, the funds must be for purposes of the welfare and needs of the child. As a custodian, you cannot withdraw money from a custodial brokerage account to pay your bills and living expenses or emergencies.
Interactive Brokers
Bank of America, Merrill Investing
Fidelity
3. A custodial Savings account
It is a regular saving account in your child's name. They take control of the account and can access it once they turn 18 years old. These funds are taxable after the first $950 withdrawn. Most financial institutions offer this type of account.
4. Education Savings Accounts (ESA)
There are two types of education savings accounts. One can take both the 529 plan and Coverdell ESA at the same time.
A 529 education plan is named after the Internal Revenue Code that allows qualified tuition plans, with rules and guidelines (management fees) set by individual states. Anyone can contribute to the 529 education plan, including relatives and friends. The benefits of the 529 plan include federal and state tax breaks. The plans vary based on the age and level of education of the student. There is no income restrictions, and the flexibility to adjust the investments. On the other hand, the cons include the limited time for money to earn interest and grow, and non-education expense relate withdrawals are taxed.
According to the IRS website, “A Coverdell education savings account (Coverdell ESA) is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. This benefit applies not only to qualified higher education expenses but also to qualified elementary and secondary education expenses.”. The Coverdell account must be started before the beneficiary reaches 18 and must be used before they reach 30 years, otherwise, taxes will accompany the withdrawals. Such account can be opened at any bank or financial institution in the name of the parents/guardians or grandparents, naming the beneficiary as the student.
