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  • Writer's pictureNathan Zarcaro

This is The Best Way to Save Money for Your Kids [2023]

Updated: May 25, 2023


Parents love their children and constantly want the best for them. And in an ever-changing world, it is important to help them prepare for their own financial futures. Unsurprisingly, many parents do save money for their kids, for a variety of reasons, like:


  • College

  • Weddings

  • Other life events


But there are so many ways and accounts that can be used to save money. Luckily, I've got you covered. This is the single best way to save money for your children.



Best way to save money for your kids


In 2023, the best way to save money for your children is to do so in a custodial account, with a couple of caveats that I will address in a moment.



What is a custodial account?


Custodial accounts are a type of financial account that parents and guardians can use to establish savings for their dependents. With a custodial account, you'll be able to save for your children without fear that they will mismanage the money, since they won't officially take ownership of the money until they turn 18 years old, though some states have set this threshold at 25.


There are two types of custodial accounts that you should be aware of: UTMA accounts and UGMA accounts.



UTMA and UGMA accounts


UTMA and UGMA accounts are a legal account type that hold money, investments, and potentially other assets on behalf of a minor. Whether you open at UTMA or UGMA custodial account depends on a couple of factors, including the state in which you reside, as well as the type of asset being gifted to a minor.


These two account types function very similarly. UGMAs traditionally hold financial assets only. Think things like stocks, mutual funds, ETFs, cash, and fixed income products. Meanwhile, UTMAs have a little more flexibility, offering a way to hold other assets, such as real estate and property.


Someday in the future, when your child is no longer a minor, these funds will officially become theirs.



Custodial account pros and cons


There are a number of benefits and drawbacks to using custodial accounts to save for the future. Among the pros are:


  • Tons of flexibility

  • No required distributions

  • Large gifts allowed



1. Flexibility


My favorite part of saving in UTMAs/UGMAs is that these accounts retain much more flexibility than other options to save for your children, such as 529 plans or Roth IRAs. As you may know, 529 money can only be used for qualifying education expenses, while IRAs cannot generally be touched until age 59.5 without incurring taxes and penalties, though there are some exceptions to this.



2. No required distributions


UTMA and UGMA custodial accounts do not require distributions at any point, meaning that they can be an excellent way to build wealth. But at the same time, it is nice that beneficiaries can access funds at any point once they officially take ownership of the account.



3. Large gifts allowed


You're probably wondering how much money you can save for your child without incurring any tax implications, and I think you'll be happy with the answer. Currently, those contributing to UTMAs/UGMAs can contribute $17,000 per person without facing the gift tax.


 

Now, here are a few things that some people may see as drawbacks.



1. Contributions are not federal tax deductible


Any money that you save for a child will be contributed on a post-tax basis, meaning that there is no real tax incentive to you for doing so. This is true with Roth IRA and 529 contributions as well, though 529 plan contributions may be deductible on the state level.



2. Can't revoke contributions


Something else to be aware of is that these assets will be considered to be your dependents once the gift is made. There is no way to revoke contributions once they are made, and these contributions must be turned over to your minor. Furthermore, once they reach adulthood, you have no claim to how this money can be used.



3. Can't change the dependent minor


You should be aware that you cannot change the dependent minor listed on the custodial account. If you make a contribution into an account with your son on it, this account will always belong to your son. Accounts are non-transferable.



Best custodial accounts for your children


Like I mentioned, these custodial accounts are very popular savings vehicles, and as such, are offered by so many different companies and financial services firms. With this said, my favorite custodial accounts in 2023 include:


  1. Acorns

  2. CIT Bank

  3. Ally Bank


Acorns Early



Acorns started as a spare change investing app but has grown by leaps and bounds. Get a $10 bonus to sign up now.


1. Acorns Early


Acorns offers great products. Started as a way to save and invest your spare change each time you made a purchase at a register, Acorns has evolved into a full fledge financial services leader.


Now, they offer a custodial account offering, named "Acorns Early."


Acorns Early is a UTMA/UGMA account and offers both SIPC insurance and the ability to set recurring automatic investments each day, week, or month. It truly takes the idea of set it and forget it to the next level.


All you'll need to get started is your child's name, birthday, and social security number. From here, you'll be able to start saving and investing for your children's futures.



2. CIT Bank


CIT Bank has been my favorite bank for some time now. Its online only presence helps CIT to keep costs low, and it rewards customers with APYs and interest rates far higher than anything offered by traditional brick and mortar institutions.


As far as custodial accounts go, CIT offers the ability to set up many of their products as custodial under the provisions of UTMA. And there are many perks to doing so:


  • Part of the earnings may be federal tax free

  • FDIC insured money

  • You can designate any age between 18-25 when the money will become your child's money


I even wrote an entire review of CIT Bank. The downside to using CIT is that you'll be unavailable to gain exposure to the stock market. You can access a variety of high-yield and CD products, but nothing equity based.


Regardless, I am a huge fan of CIT's Savings Connect product, essentially a high-yield savings account that currently offers a 4.60% APY.



3. Ally Bank


Ally Bank is another great option for those looking for the right custodial account to prepare for their children's futures. Unlike CIT, you will be able to use this account to invest for your kid's futures.


Offering both UTMA and UGMA accounts, depending on your state of residence, Ally custodial accounts come with the option to invest in a variety of securities, such as:


  • Equities: stocks, mutual funds, and ETFs

  • Fixed income: government and corporate bond offerings


Plus, I love that Ally does not assess any sort of account fees or have any minimum balance thresholds you'll need to meet.



Other ways to save money for your children


Custodial accounts like UTMAs and UGMAs are far from the only way you can save money to take care of your future children. In fact, you may consider a number of other options, such as:


  • A 529

  • Roth IRA for Kids

  • Trust Fund



1. 529 plans


529 plans are college saving vehicles that can be used to help fund your dependents' educations from kindergarten through college. 529s are tax advantaged, and contributions are tax deductible in certain states, though not federally.


Additionally, much like some retirement accounts out there, you'll earn tax free growth in any investments made in the 529. To make things even better, when used for qualifying educational expenses, withdrawals are also tax free!


These are all positives, of course, but also a negative that you should be aware of.


First, because these accounts are so tax advantaged, you'll need to use the money for educational expenses, or else you could face a penalty. Thankfully, Congress recently took action to make this less rigid.


Starting next year - January 1, 2024, the Internal Revenue Service will allow up to $35,000 of leftover 529 money to be rolled directly into a Roth IRA for your dependent, as long as the account has been opened for a minimum of 15 years.


This rule could come into play in certain scenarios where you've saved money and your child doesn't go to college.



2. Roth IRA for Kids


Many parents don't realize that they can actually open a Roth IRA on behalf of a child. The best part is that these accounts are able to leverage all of the amazing parts of this account type.


For instance, contributions and investments will grow tax-free, and withdrawals also won't be taxed as long as they are made after your children turn 59.5. Exceptions are made for life events such as a first-time home purchase, but otherwise, taxes will be assessed, and a 10% penalty will be imposed.


Roth IRAs are a very powerful way you can save for and ultimately help your child to build lifelong wealth!



3. Trust Funds


Some parents, typically those with some wealth, will establish trust funds for their children to take ownership of one day. Unfortunately, trust funds do not have as many tax advantages as either 529 plans or Roth IRAs.


For example, distributions from a trust are taxable, and the trust's beneficiaries (your children) are responsible for paying them.


Estate attorneys can help you get started, but you should know that trusts can be quite expensive to establish.



Final thoughts


I believe that custodial accounts are the best way to save money for your children's futures. They may not come with much in the way of tax benefits, but they allow your children maximum flexibility and the opportunity to experience financial security early in life.



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About Nathan Zarcaro

Nathan Zarcaro is the founder of The Student Debt Destroyer and is passionate about personal finance related causes.  A 2018 graduate of Providence College's Liberal Arts Honors Program, Nathan studied Finance, and has worked for industry leaders in both finance and healthcare.  In his free time, Nathan enjoys playing golf and traveling with his wife Brigid.

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