Saving $$$ for kiddo's - Guide

[mathetes66]

Ok, so recently I was looking for ways to start funding my kiddo's future (we have four of them and yeah, I'm going to be working forever haha).

Anyways, I started to look at some ways to stash some money aside for my kids. I ended up turning this into a video project on YT (Link -

) and thought the folks here would value this info as well.

Ok, so I looked at three different options. A traditional 529 College Savings Plan, a custodial account like Acorns Early, and a standard savings account.

529 College Savings Plan

Pros

-Reduces your taxable income, money grows tax-free and can be withdrawn tax-free for qualifying education expenses.

- Funds can only be used for educational expenses

Cons

• Penalties for using funds other than for educational expenses are federal, state, and local income tax, plus a 10% federal tax on the earnings portion of the withdrawal
• The account holder can change the beneficiary to any other family member, or themselves should the child choose not to use the 529 funds.
• Lifetime maximum of 325k

Custodial Account like Acorns Early

*Real quick, a Custodial Account just means an investing account opened by an adult for a minor. Acorns put this money into their “Aggressive-growth” portfolio to maximize the growth potential of 18 or 21 years of compounding gains.

Pros

• Children gain ownership only once they hit adulthood.
• Ownership is unchangeable
• Can use the funds however they want
• Withdraw funds anytime as long as it’s used to support the child
• Easily text message a link to friends and family who want to contribute money to the plan

Cons

• Assets count as income for the child
• When your kid goes to apply for FAFSA for Federal Student Aid for college these funds will be weighed as assets and could reduce the amount of FASFA aid received
• These funds are taxed - first $1,100 tax-exempt, next $1,100 child’s bracket (10%), next $2,200 taxed at trust and estate level
• Assets are in the stock market - which has ups and downs. Overall has shown a 10% return year-over-year since 1965

Savings Account

You probably already have one of these set up with your bank. It’s just an account to put some money aside for mid to long-term holding.

Pro’s

• Easy access
• Risk-free
• Earn a bit of interest (typically .04%)

Con’s

• Interest rates paid for a savings account, won’t keep up with inflation (1.8%)
• Easy to access can also be a negative - as it could be tempting to pull $$$ out
• You’re missing out on 18 - 21 years of compounding interest if your $$$ were in the stock market (S&P Average 10% annual rate of return)

Overall

I would say that if you’re specifically saving money for Higher Education then nothing out there is beating the 529 College Savings Plan as the tax benefits are just too good. Now, if you’re saving money for the child overall and want them to be able to use the funds however they choose, then a Custodial Account like Acorns Early would be a great choice.

Lastly, it’s a pretty common strategy to start with a Custodial Account like Acorns Early and convert it into a 529 College Savings Plan at a later date. Win-win!

I hope this helps somebody. It was a ton of research to put together haha.

Thanks!

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[ronaldus]

@mathetes66 You might try a finance sub for posts like this.