What accounts should I open for my kids?

How is it that January lasted an entire year, but February lasted about six hours? As the days get longer and slightly warmer, I can feel my seasonal depression melting away with the sheet of ice that covers my entire yard. I know this is fake spring, but it’s also a glimmer of hope. Just let me have this 48 degree moment in the sun, y’all.

As I walked down to my mailbox today, thinking about how I’m about to have two kids and a double stroller this spring, I started thinking about the accounts I want to open for them and the savings and investing strategy I’d like to create for them.

This is one of those topics that came up A LOT among the young families I worked with as a financial advisor. Parents would ask me what accounts they should be opening for their children, and my default answer was always slightly vague and annoying - “It depends.”

Much like the strategy an adult would take to save and invest for themselves, you should take a similar approach for your children.

But before you open and dump money into any account, I want you to ask yourself a few basic questions about the state of your money:

1. Do I have high interest debt I need to pay down?

2. Do I have an emergency fund in place or at least a growing emergency fund?

3. Am I saving for my own retirement?

If you answered ‘yes’ to all three, now you’re ready to start saving for your kid(s). It’s not callous to put yourself first in this situation. What do they tell us on airplanes? Put your mask on first before assisting children or others. If you can’t breathe, then you aren’t going to be helpful to anyone.

Secondly, if your financial situation sucks, prioritizing saving for your kids is not going to help. Look down the road 30 years or so. If your money situation is still suffering, you’ll likely become a financial burden on your children. They may have to pay for your care, subsidize your retirement, and take you in while trying to raise a family of their own. If they choose to do these things, well, then that’s great. But if they’re forced to do these things because you didn’t save enough for yourself, that’s another story. Say it with me now: “Re-sent-ment”.

So get your sh*t together first, then start saving/investing for the kiddos.

But what accounts should you open?! Again, this comes down to goals. Is your number one priority paying for college? Helping them with an eventual down payment? Or just generally setting them up well for adulthood? There are various accounts you can open to help achieve these goals.

1. 529 College Savings Plan - The name says it all. It’s a tax-advantaged college savings plan. They are state-sponsored and some are slightly better than others. You can choose what state plan you’d like to participate in, but if you aren’t a resident of that state you may not get the tax benefits. For example, I live in Connecticut and after my daughter was born I opened a Connecticut 529 (https://www.aboutchet.com/). It’s one of the best 529 plans in the country and provides us with a tax benefit where we can deduct up to $10,000 per year in contributions from our state taxes. The money in the account is invested and then grows tax-deferred. If we use the money for “qualified” educational expenses (you’d be surprised at how wide ranging this list is!), then the money we withdraw will be tax-free.

2. UGMA/UTMA - These accounts are like regular brokerage accounts except the adult who opens it is the custodian of the account until the child becomes an adult (usually either at 18 or 21). There aren’t the tax advantages of the 529, but it’s also not strictly for education purposes. There’s more flexibility. You also have to be careful because once the kid is 18 or 21, this money is there’s to use as they see fit! If I had an account like this at 18, every H&M in New England would’ve hate to see me coming. Is H&M still in business???

3. Trust Account - Trust accounts are a bit more complex to set up but essentially you can invest and save for a child and then determine the rules in which they can access the money. It’s generally best to consult with some professional folks if you’re interested in setting up a trust for your kid(s).

4. Custodial IRA/Roth IRA - Much like a UGMA/UTMA account, this is a parent/guardian run account but for retirement savings. The catch here is your child has to have earned income. These are great accounts for teens with jobs. When I was a teen I planted flowers for the city I grew up in. I also worked as a mascot for a summer baseball team. In college I folded so many City Sports t-shirts that my clothes folding skills are now ELITE.

5. Cash Management Accounts - These are checking/savings accounts for kids managed by parents/guardians. These are great for teaching kids budgeting skills, how to spend and save responsibly, and a bit of financial literacy. Not all financial institutions offer these accounts, so it’s best to do a little research ahead of time.

Whatever you choose for your family is up to you! The important thing is to establish good habits and an eagerness to learn how to properly manage money. This starts with YOU! Set a great example for your kids by learning how to manage your own money, save, and invest it. This is a family journey! It is both the greatest honor and terrifying responsibility knowing our children watch and learn from our every move. No pressure, no pressure.

One thing you should know this week:

1. If you’re going to be in or around NYC on Tuesday, March 11th - come see my musical parody! A portion of the proceeds will benefit the Entertainment Community Fund. Laughs for a good cause? Sign me up! Tickets here.

I’ll talk to you next week! Love to love ya!

-Catie