Smart Savings

Children enrich our lives in so many ways, but they sure don’t come cheap! Every parent knows that expenses related to child-rearing can feel endless. From covering essential needs like diapers, food, and clothing to managing their many wants and must-haves, and planning for their future, the financial demands can quickly add up.

Fortunately, there are many convenient and accessible ways to save up for your child’s future to make these demands more manageable. Let’s take a look at several popular savings options you can open for your kids, and the benefits and factors to consider for each one.

1. 529 Savings Plans

A 529 plan is a tax-advantaged account designed to encourage saving for future educational costs. These plans are sponsored by states, state agencies, or educational institutions and offer significant tax benefits.

Benefits:

• Tax advantages. Earnings grow tax-deferred, and withdrawals for qualified education expenses are tax-free. Some states also offer tax deductions or credits for contributions to their own state’s 529 plan.
• High contribution limits. 529 plans typically have high contribution limits, allowing you to save a substantial amount over time.
• Flexibility. Funds can be used for a variety of educational expenses, including tuition, room and board, and even K-12 education in some cases.

Considerations:

• Investment options. 529 plans offer various investment options, including age-based portfolios that become more conservative as the beneficiary approaches college age.
• Fees. Most 529 plans have annual fees, which vary by state and institution.
• Ownership. The account owner of a 529 plan has full control over the funds; the beneficiary does not.

2. Custodial Accounts

Custodial accounts allow an adult, or “custodian,” to transfer assets to a minor without the need for a trust. These accounts are a flexible way to save and invest on behalf of your child.

Benefits:

• Flexibility. These accounts can hold various types of assets, including cash, stocks, bonds, and mutual funds.
• Control. The custodian manages the account until the child reaches the age of maturity, typically 18 or 21, depending on the state and specific type of account.

Considerations:

• Tax implications. Earnings are taxed at the child’s tax rate, which is usually lower than the parent’s rate.
• Ownership transfer. Once the child reaches the age of maturity, they gain full control over the account.

3. Money Market Accounts

Money market accounts combine features of savings accounts and checking accounts, offering higher interest rates along with more access to your funds, often through debit cards and check-writing privileges. Many, but not all, money market accounts have higher minimum balance requirements.

At Bay Federal Credit Union, the Money Market Advantage has no minimum balance requirements and actually pays its highest dividends on the first $2,500 in deposits, making it an attractive option for growing your child’s savings.

Benefits:

• Higher interest rates. Money market accounts generally offer higher interest rates than regular savings accounts.
• Liquidity. These accounts often provide more flexibility and access to funds through check-writing and debit card options.

Considerations:

• Minimum balance requirements. Money market accounts may have higher minimum balance requirements.
• Limited transactions. There may be limits on the number and type of transactions you can make each month. While regulations that set up these limitations have gone away, check with your financial institution to ensure you have the access you need.

4. High-Yield Savings Accounts

High-yield savings accounts offer higher interest rates than traditional savings accounts, making them an excellent option for growing your child’s savings with minimal risk.

Benefits:

• Higher interest rates. These accounts offer significantly higher interest rates, helping the savings grow faster.
• Safety. Funds in high-yield savings accounts are typically insured up to $250,000 per depositor, per institution.

Considerations:

• Accessibility. High-yield savings accounts are usually available online, making them easy to manage.
• Interest rate variability. Interest rates can fluctuate based on market conditions.

5. Share Certificates or Certificates of Deposit (CDs)

Banks call these accounts Certificates of Deposit (CDs), while credit unions refer to them as Share Certificates. However, both are accounts that offer a fixed dividend rate for a specified term, ranging from a few months to several years. If you’re looking for a place to keep your child’s savings, a share certificate or CD can be a fantastic option. These accounts offer the best of both worlds when it comes to savings — blending the growth you’d expect from a stock with the security of a savings account.

Benefits:

• Fixed returns. Share certificates and CDs offer a guaranteed return, making them a safe investment.
• Higher interest rates. Longer-term share certificates and CDs typically offer higher earning rates than regular savings accounts.

Considerations:

• Early withdrawal penalties. Withdrawing funds before the certificate matures may result in penalties.
• Limited liquidity. Funds are locked in for the term of the certificate.

Opening a savings account for your child is a smart way to secure their financial future and instill good money management habits early on. Use this guide to make an informed decision about choosing the perfect savings account for your child.

Not all financial institutions offer the same range of products, so it’s important to explore your options before making a decision. To ensure you find the best fit for your child’s savings goals, take the time to compare options or consult with a local banking representative. They can help you navigate the various products available and recommend solutions that align with your financial goals, helping you make the most informed choice for your child’s future.

Tax implications will vary by individual and financial product. Please consult a certified tax professional or financial advisor to review your unique situation and understand the potential tax benefits and obligations.