Dear Carrie: I would like to open a savings account or a Roth IRA for my 6-year-old son. What do you think? -- A Reader
Dear Reader: Saving on behalf of your son is a great idea. And I'm sure a lot of other parents are trying to find their way through the maze of choices, so I thank you for the question. Here are some things to think about as you make your decision.
First, ask yourself, "What is my goal?" If it's as simple as teaching your son how to save, an old-fashioned savings account is a good place to start. The goal will be to have him experience the satisfaction of watching his balance grow.
But I suspect you're thinking bigger -- that you want to start preparing him financially for later life. That usually means three possibilities: saving for college, saving for adulthood or saving for retirement. Of course, these aren't mutually exclusive, but you'll want to consider different vehicles for each.
And before we go into different account types, recognize that any account you open for your minor child will be a custodial account. This means that it's legally his money, even though it will have both your name and your son's name on it. You control the money until he's 18 or sometimes as old as 25 (depending on your state's laws and your preference), but after that it's his to do with as he pleases.
-- College savings/529 plan: For most parents, saving for college is priority No. 1, and 529 plans offer two very powerful incentives. First, money invested in 529 plans grows tax-free, and withdrawals, including investment gains and income, are tax-free when used for "qualified" expenses for college (tuition, room and board, books, etc.). Second, a 529 plan is considered an asset of the parents, which means there's less of an impact on financial aid than if the assets were in the name of he child.
You can invest quite a lot of money in a 529 plan; with roughly 12 years to go before your son will matriculate, you've got time to put that money to work. It pays to shop around. Some states offer 529 plans with additional tax incentives; some plans have better choices and/or lower expenses.
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