Planning Reflection | October 28, 2022
Many adults stashed pennies in a jar or opened a savings account at a local bank when they were children, encouraged to save by their parents. For today’s children, there are a broad range of web-based options to develop financial know-how and begin to develop good habits. Apps exist for a range of transactions – allowance, payment, and investing – that parents and their kids can learn together. Kids become more confident about handling basic finances as parents broaden their knowledge of financial tools as well.
Money impressions tend to be set in childhood. Helping kids begin their savings early can give them confidence in their ability both to save and to spend wisely. Knowing when it makes sense to buy something in the present versus saving to spend on something else in the future is a key skill they’ll need for life. It is also a foundation for understanding more complex financial concepts as they grow. Whether for savings, sharing, or spending, there are a host of vehicles you can use to give them guidance and practice until the training wheels can come off.
Savings and Spending
A young child might receive a regular allowance tracked by a parent or cash gifts on birthdays and holidays. To help them accumulate rather than spend it all, one of the simplest things to do is to open a separate savings account in the parent’s name. The child can keep some cash for current spending, or add it to the account. Any interest will be taxable to the parent, and the funds remain completely in their control. Many online banks allow you to easily open several different accounts without minimums or fees.
Once a child reaches age 13, most banks will offer the option of a teen joint checking account, where a parent or legal guardian is a joint account holder. The account usually comes with a debit card, which is essential in this age of phone-as-wallet. Having a joint account allows deliberate discussion of spending and saving; both parents and teens can log onto their accounts and understand where the money is going. Young people face a plethora of temptations to spend money via social media; whether electronically or in the brick-and-mortar world, spending choices can add up quickly. Getting experience with paying for choices made on the spur of the moment or when hanging out with peers helps them start to think ahead about their priorities.
For gifting or saving on a larger scale, custodial accounts are an option. Known as Uniform Transfer to Minors, or UTMAs, these accounts can hold cash or investments and remain in the custodian’s control until the child reaches age 18 or, in some cases, 21. While there are many pros and cons to saving in an UTMA, the most important thing to keep in mind is that it is an irrevocable gift to the minor when it’s created and must be turned over to them when they reach the specified age. Parents may or may not clearly communicate their intentions for how the money should be spent, but talking about it can be especially helpful in discussing how large expenses, such as college, are going to be funded.
Saving for Higher Education
Most parents make a large contribution to higher education, whether it be through gifts, loans, or facilitating a combination of both for their kids. Kids have a contribution to make as well, and parents can take the mystery out of how college or graduate school should be paid for by involving them in the discussion. Young people live in the present moment, and a nebulous idea of saving for the future may not spur them to savings action. But giving them a goal, like saving to have spending money in college or saving toward a car they need to live off-campus, makes the benefit more concrete in their minds.
Practically speaking, 529 accounts are an even more effective choice than UTMAs for parents to save for tuition, room and board. These types of accounts can be owned by anyone, meaning they don’t have to be opened by a parent for their child: grandparents, other family and friends can open them, with a child as the beneficiary. Any accumulated growth in the account can be withdrawn tax-free if it is used for qualified education expenses, and they can be opened for someone of any age.1 If the initial beneficiary doesn’t use it, it can be transferred to another family member without material tax consequences. UTMAs don’t have the same tax advantages as 529 accounts for educational savings, although they may be a better choice to transfer assets for other purposes.
Earned Income Means More Options
Once people begin earning money, the opportunity for tax-advantaged savings becomes available to them. For minors, custodial IRAs and Roth IRAs can be opened, and they can contribute up to the amount of their income. If they earn $1,000 per year from babysitting and odd jobs, then $1,000 per year can be contributed to one of these custodial accounts, where it can be invested. Roth accounts are especially valuable over the long term because their earnings are never taxed. They take full control of the account once they reach the age of 18 and can continue to contribute to them from that point on. By giving kids access to this to this type of savings early on, by the time they’re 30, they could accumulate a meaningful nest egg in their retirement accounts.
Building a Framework
Money is generally an uncomfortable topic for most people, and talking about it with kids is no exception. Kids are curious and will pipe up with questions and requests, which can make it easier to talk with them about money and get them involved. Like starting to save, the best time to begin this conversation is now. Opening up this dialogue gives kids a framework to build on and establishes an expectation that they can reach out to you for advice as they learn.
1 Martha Kordiak Murt, 529 Qualified Expenses: What Can You Use 529 Money For?, Savingforcollege.com, August 26, 2022
About Jena Regan, CFP®
Jena Regan is a Lead Advisor with North Berkeley Wealth Management. Jena works with clients to gain a sense of calm in their financial lives.
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