In today’s episode, Andy chats with Damian Dunn about how to save for our children’s future.
Damian is the director of personal finance strategies at Your Money Line and is the co-host of the Pete the Planner Show. He’s been working in the financial industry for nearly 20 years and is passionate about providing accessible and affordable financial guidance to anyone seeking it. He also has two kids of his own, and lives in Indiana.
1. 529 College Savings Account
Student loan debt is at a whopping $1.5 trillion and growing at an alarming rate. Damian explains that the best way to start preparing your kids for college and avoid the student debt crisis is to start saving as soon as possible.
The best place to get started? The 529 account for college savings.
These accounts are created especially for college savings – and with the recent tax law changes, you can even use them for private school before college.
By investing in a 529 account, you're setting money aside and allowing it to grow in the stock market. You then use it for qualified expenses such as tuition and don't pay taxes on the growth. Other qualified expenses include a laptop, room and board, books and more. Not a bad deal.
However, there are a few things that a 529 account does not cover – for example, student loans. This is important to keep into account because if your child does have some money leftover in the 529 account once they’ve finished college, they can’t use that account to pay off student loans.
What if you have two kids? Each 529 account must have one beneficiary, which means that money can only be used for expenses incurred by that child. Therefore, it’s probably smarter to have two 529 accounts and simply change the name of the beneficiary if you end up not needing the money (e.g. scholarships).
2. 529 Prepaid Tuition Plan
Another saving vehicle to help plan for your child’s education: 529 Prepaid Tuition Plan.
How does this differ from the normal 529 account?
The 529 Prepaid Tuition Plan is a way to lock in current tuition rates and purchase that tuition today. You need to be 100% sure that your child will go to an in-state school.
The disadvantage with the 529 Prepaid Tuition Plan is that you probably won't earn the same type of return as a normal 529 Savings Plan. Damian explains that if you’ve got a nice time horizon between now and when your child goes to college, a 529 Savings Account is the best way to go.
If you’re sure your child is going in-state and you want less expensive tuition, then a 529 Prepaid Tuition is a good deal.
3. Roth IRA for Kids
It's never too early to get your kids started saving for their retirement. If your kids have an earned income, starting a Roth IRA for kids can be a smart move to help them enjoy their older years without a worry.
The Roth IRA also gives your kids flexibility as they grow as well. They can take out their contributions well before the age of 59 1/2. If they need a little more money to get through the year, the Roth IRA is a great pool of money to make use of. It doesn’t matter what you use that money for. Since the taxes have already been paid. , you can use it for weddings, a house, etc.
Damian gives us an example of the power of compound interest and the Rule of 72:
A couple manages to save up $10,000 in a child's Roth IRA by the time their child has graduated high school. If their child doesn’t touch it and it’s earning a return in the stock market, that’s going to turn into $20,000 by the time they’re 28, $40,000 by 38, $80,000 by the time they’re 48 and so on. That’s money that can really help make a difference.
Related Interview: How I Helped My Daughter Secure Her Financial Independence with a Roth IRA – with Doug Nordman
4. UTMA / UGMA
The last saving vehicle that is sometimes mentioned is a UTMA, which stands for Uniform Transfer to Minor Act.
It basically allows you to gift any kind of asset into these types of accounts: cash, stocks, bonds, real estate and precious metals. Those assets will then sit in that account for the benefit holder (the child). As a parent or custodian, you have control over that account until they reach a designated age – usually 21 or 25.
However, there are a few downsides. Since the account is in their name, the child can do whatever they want with the money once they reach the age. The other thing to consider is that a UTMA account will have an impact on the eligibility of financial aid and college – it will be looked and considered differently than if it’s the parents that own the assets.
5. High Yield Savings Account
Then, there’s always a good old savings account.
As Damian says, being a responsible saver always pays off in the long run. A high yield online savings account can allow your child to grow their savings, keep the money liquid (readily available) and avoid any volatility in the stock market.
The important part is to get the kids involved in conversations about money as soon as they are emotionally ready to have them. This could be something like explaining what a paycheck is and how it allows you to buy certain products.
Let them help in making some family decisions. They can get a taste of the trade-offs and understand how far money can take them.
If kids become familiar with the basics of money management from a young age, it’s much easier for them to do a transition into college life and eventually adult life. Giving them some of the control of a savings account can be immensely useful.
At the end of the interview, Damian gives us a few tips for parents who are getting started with saving up for college. The biggest tip: make your payments automatic. This way, you don’t have to worry about them anymore and over time “accounts build in good times and contributions still happen in bad times.” Keep throwing money at it even when the markets go down, and that’s when you make the big progress!
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Carpe Diem Quote
“What a child doesn’t receive, he can seldom later give.”P.D. James
We didn’t use 529’s for our kids, we just intended to cash flow all three of their college educations which we could have done since we had a high income. But I’m glad we didn’t use 529’s because all three covered 100% of their college costs with scholarships! If we had used a 529 we would not have had any place to use that money since neither my wife nor myself are interested in further paid education for ourselves.
WOW! That is incredible. You must be a proud parent!