As a new parent, I want to give my son the world. Just the other day, my husband and I had a passing conversation about potentially saving to help Jax buy his first home. He's 3 months old, so the math is simple. If we save a few hundred dollars a month for the next 30 years, he will have a pretty nice nest egg before we know it. In working to support your own child’s future, keep non-traditional savings options in mind to go beyond college funding and other basics.
As a financial planner, I know that most parents jump to college funding when they think of saving for their children. That's wonderful, but what if college isn't the path for your child? Or what if you just aren't sure at this point? And of course, some people want to do more than strictly save towards education. We want to give our children the world — or at least a small part of it.
The Limits of College Funding Accounts (Like the 529)
Traditional college funding accounts like the 529 have a lot of benefits, but there are beneficiary restrictions, limited investment options, and penalties if the funds aren't used for qualified educational expenses. So in some cases, saving into these accounts could make it harder to reach the goal.
For example, I have clients building a “fellowship fund” for their child. They want to provide funds as she becomes an adult, but she's still a toddler so they don't know what her path will be. When the time comes she can use the money to travel, fund apprenticeships, or have a traditional college experience — it’s a decision they will make together. In their case, we aren’t saving any money into a 529. They won’t receive any of the tax benefits of a 529, but that’s ok because that type of account is inappropriate for this goal.
In a case like a "fellowship fund" there are two savings options that I like to consider:
1. Accounts in the Adult's Name
This could include saving into an existing account or establishing a new account. In either case, the account is owned by an adult who can choose investments that are aligned with the goal and create a strategy to continue building funds in the account.
Pros
The adult maintains ownership and total control of the funds.
Flexibility with contributions and withdrawals.
Freedom with your investment options.
Cons
There are no additional tax benefits.
The funds need to be gifted to become the child’s asset.
2. Accounts in the Child's Name
This might include a UTMA or UGMA, which are custodial accounts held in the child's name with an adult attached until the age of majority. This can be an investment account with a portfolio and a savings strategy that's in line with our goal.
Pros
Freedom in your investment options.
Flexibility upon withdrawal.
Cons
This is legally the child's asset so they will have access when reaching the age of majority.
Account deposits are considered gifts when moved into the child's name.
Perhaps your mini-Zuckerberg is still in diapers, but it’s never too early to start saving for their “fellowship fund.” Get started with Merino Wealth and we can help empower you (and your children) to reach your possibilities!