5 Ways to Help your Kids Become Rich


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So many people are curious how to build generational wealth. We want the best for our kids and for them to have financial security. Today’s article was inspired by a question from Nate M., who says, “Does interest income from savings bonds purchased for my 3-year-old child count as qualified income for contributing to an IRA for her retirement?”

Thanks for your question, Nate! I love that you’re already thinking about her financial future. If you also have kids or want to start a family someday, it’s essential to get familiar with strategies and accounts that make it a little easier to save and invest for them.

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How to set your kids up for financial success?

In this episode, I’ll answer Nate’s question and review five ways you can set your kids up for success. You learn when to start saving for a child and how it should fit into your financial goals. 

Let’s talk about your goals first. Being a parent means you’ve got plenty of ongoing expenses. Of course, you want the best for your children, but you also need to make wise decisions for your own financial future. 

If you sacrifice your financial security to save for your kids or put them through college, you may find yourself relying on them to support you in your old age! So, only set aside money for your kids if you can genuinely afford it. 

Ideally, you should regularly save at least 10% to 15% of your gross income for retirement before saving for your kids. And if you’re less than 20 years from retirement and haven’t reached 80% of your savings goal, I want to encourage you to stay exclusively focused on building your retirement nest egg. 

Yes, I know it might sound coldhearted for a parent to refuse to pay for a child’s education. Remember that kids have options, such as working, getting scholarships, and taking out federal student loans. However, you won’t have any loans or grants to support you in retirement after you stop working. 

Later on, if you end up with a surplus of retirement savings, you can help a child by paying off their debts or giving them cash gifts. The bottom line is that you must shore up your financial well-being first, even if that means saving nothing or less than you’d like for your kids. 

When the time is right to save and invest money for your kids, or if you can afford it now,  here are five ways to help them grow rich.

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Use a bank savings account.

An FDIC-insured bank savings account is one of the safest places to squirrel away money for a child’s future. The problem is, it doesn’t come with many benefits. A regular savings account pays relatively low interest, and what you earn gets taxed as income.

If you have a large amount to save, consider getting a high-yield savings account, which can pay up to ten times the national average for regular savings. However, what you earn is still lower than other options we’ll cover.

For example, if you save $100 a month for 20 years in a bank account earning 0.25% interest, you’d accumulate less than $25,000. But if you put the same amount in high-yield savings making 4.5%, you’d have almost $37,000 after two decades.

Another option is to open a certificate of deposit or CD with a bank or other financial institution for even higher returns. CDs can be FDIC-insured, and they’re also extremely safe.

With a CD, you loan money to the institution, which lends it to their customers, and you receive a set rate for a period, which is called the term. CD terms can range from a few months to a few years. In general, the longer the term, the more interest you receive. When the term is up, you receive your initial deposit plus any interest accrued.

Using FDIC-insured bank savings, high-yield savings, or a CD means that it’s entirely safe from investment risk. But in exchange for safety, they pay modest interest. That means you could be leaving many thousands of dollars on the table compared to investing the funds. 

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Open a 529 college savings plan.

Paying for college is the most common reason parents want to sock away money for their kids. If you or your child know that college is in the future, one of the best options is to open a 529 college savings plan.

With a 529, you contribute funds on any schedule you like and choose how to invest them from a menu of options, such as mutual funds. The funds can be withdrawn tax-free if you use them to pay qualified education expenses, such as tuition, fees, books, required equipment, and room and board.

Funds in a 529 plan can be spent at U.S. accredited schools and even at some foreign institutions. For example, you could live in Florida, participate in a New York 529 saving plan, and use the funds to send a child to college in California.

Thanks to the Tax Cuts and Jobs Act, you can spend up to $10,000 per beneficiary per year tax-free on elementary and secondary school expenses. That gives parents the flexibility to withdraw funds for tuition and other education expenses for a younger child attending a public, private, or religious school.

You can use a 529 no matter how much you earn, and the maximum annual contribution limit depends on the plan you choose but could be over six figures per student!

Funds in a 529 belong to the owner (typically a parent), and the account can have one designated beneficiary, who is the future student. So, if you want to save for more than one child, you generally must open an account for each of them. However, you can also change a 529 beneficiary to another member of the family or roll it over to another 529 without triggering taxes.

States generally sponsor their own 529 plans, and many offer additional tax savings, such as a tax deduction or credit on your state income taxes for contributions. The fees and benefits—such as the maximum contribution limit, investment options, and in-state tax benefits—vary considerably.

Due to the benefits that come with a 529—such as tax advantages, flexibility, and high contribution limits—it gets my vote as the best account to save for a child’s education. Additionally, your 529 distributions get favorable treatment because they’re a smaller factor in the calculation for financial aid thanother options we’ll cover.

The main drawback is that if you use a 529 for non-qualified education expenses, you’ll have to pay income tax, plus a 10% penalty on withdrawals of account earnings. So never put more in a 529 than you estimate your child will need for their total education expenses. Also, note that you can’t start funding a 529 until your child is born and has a Social Security number.

To sign up for a 529, you can go directly to the plan manager, use a financial advisor, or start doing your homework at a site like Pelican

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Invest money in a UGMA or UTMA account.

What if you want to save money for a child for non-education expenses? In most states, minors can’t own investments and financial products in their names. That means parents can’t just give investments or transfer assets to a minor child without creating a trust or creating a custodial account known as a UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act). They allow investments for minors, such as mutual funds and real estate, to be held in the care of an account custodian.

You can set up a custodial account at most banks and brokerage firms, such as Fidelity or Vanguard. Then you can make withdrawals to cover expenses that benefit a child, such as education and healthcare.. And when they become an adult (usually 18 or 21, depending on your state), the account assets automatically transfer into the child’s name.

The main benefit of using a UGMA or UTMA account is that you can give a child as much money or assets as you like. There are no annual limits, anda portion of the account’s investment earnings gets taxed at your child’s income tax rate, which can reduce taxes.

The downside of UGMA and UTMA accounts is that once the child reaches the age of majority, parents have no control over how the child spends the funds. Also, custodial accounts are considered an asset of the child, which means they’re a more significant factor in the calculation for financial aid than accounts owned by a parent, such as a 529 plan

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Buy life insurance.

Life insurance is a contract that pays one or more beneficiaries after the policyholder’s death. There are two main types of life coverage: term and permanent.

A term policy pays a cash benefit if you die within a period, such as 10 or 20 years. And a permanent policy covers you no matter when you die, and it may also accumulate a cash value that can grow for a child.

If you’re relatively young and healthy, a $500,000, 20-year term life policy may cost less than $20 per month. It’s wise to cover both parents, even if one is an at-home caretaker because the cost to replace them would be significant.  

If you get life insurance through work, it may not be enough. Most companies offer coverage in an amount equal to one or two times your annual salary. Depending on your financial needs and family size, having life coverage in an amount equal to ten times your income is a good rule of thumb. 

Also, remember that if you leave your job or get terminated, your life coverage will end. Since you can have multiple life policies, it’s wise to maintain your own insurance, in addition to any you get through work. 

The downside of life insurance is that it typically doesn’t provide a benefit until the policyholder dies. However, if you have a permanent policy that builds cash value over time, you could tap it to pay expenses for a child, such as education or a vehicle.

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Contribute to a Roth IRA.

This gets us back to Nate’s question about whether his young child qualifies for an IRA. 

Many people don’t realize that kids can have an IRA if they have earned income from a part-time job or self-employment. As a parent, you can make an IRA contribution on your child’s behalf, for as much as they earn, up to the annual limit, which is $6,500 for 2023. But you can’t fund an IRA for an infant or toddler who can’t legitimately earn income.  

Nate, unfortunately, your child’s investment income doesn’t make her qualified to have an IRA. 

However, if you qualify for a Roth IRA, you can fund it and take future withdrawals to pay her future expenses. There is an annual income limit to qualify for a Roth IRA, so if you’re a high earner, you may not be eligible to make contributions.

Unlike other retirement accounts, you can withdraw your original contributions (but not earnings) from a Roth IRA before retirement without having to pay taxes or a 10% early withdrawal penalty. That flexibility makes a Roth IRA a great account to invest for retirement and a child’s future expenses.

This article originally appeared on Money Girl and was syndicated by MediaFeed.org.

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