A Comprehensive Guide to Financial Planning for Kids

• Before making any big moves on behalf of your children, ensure you’re saving for your financial future.
• If your financial needs are met, saving small amounts of money for your child’s future is prudent. This can add up over time, and using a tool like Payactiv’s Goal-Based Saving¹ feature can help.
• You can also consider other investments, like 529 accounts or Roth IRAs, in your child’s name.
• If you have a disabled child, you can explore options like ABLE accounts or third-party supplemental needs trusts.

When it comes to saving for your child’s financial future, it’s wise to start while they’re young because small amounts add up over time. You can build a nest egg for your kids with as little as $5 a month using Payactiv’s Goal-Based Saving Feature.

If you’re confident in your own savings, you can explore other avenues for financial planning for your kids, including investing.

Make Sure You’re Investing for Yourself First

We all want to give our children the world. Sometimes, this desire causes us to put our own needs behind theirs. We see this trend across many aspects of life, including financial planning.

While saving for college and your children’s future is smart, it’s important that you make sure your bases are covered first. 

For example, when it comes to college, your child might be able to get scholarships, grants, or even loans for their education. However, when it comes to your retirement, you won’t be able to get scholarships to cover the costs of aging.

If you can’t financially care for yourself in your golden years, that burden may fall on your children. By saving for your future, you’re also supporting theirs. This is why it’s critical to make sure you’re fully funding your retirement accounts before setting ambitious goals for your children’s financial planning. 

Start Saving for Their College With a 529 Account

If you have leftover money after saving for your own retirement, a 529 account is a great way to save for your child’s future. These accounts provide tax advantages if the money goes toward education. But, at the end of 2022, their uses became far more expansive.

When Congress passed SECURE 2.0, the laws changed allowing the first $35,000 in your child’s 529 account to convert to a Roth IRA, which can be valuable if they don’t attend college. This means that the money you save won’t lose all tax advantages. Those advantages just transform into a retirement account.

Start Their Retirement Savings Early With a Roth IRA

When your child is a teenager and earning money from their first job, you can open up a Roth IRA in their name. Time in the market is one of the most significant contributing factors to building an adequate nest egg for retirement. 

If you can get them in the habit of investing early, it will serve them tenfold, even if you can’t afford to invest for their retirement yourself. 

Consider an ABLE Account For Disabled Children

If your child relies on SSI, Medicaid, or any other state programs for disabled people, you’ll want to look into an ABLE account. ABLE accounts shelter your savings from asset tests, which means you can build an emergency account or invest in the market for their future. 

SECURE 2.0 also passed a provision that makes it so those who are disabled before age 46 can open their own ABLE accounts starting in 2026. Previously, this limitation used to be before age 26. 

If you’re a parent with a disability, ABLE accounts could be a powerful financial tool as you care for your family.

Pair ABLE Accounts With Third-Party Supplemental Needs Trusts

Some people use ABLE accounts in conjunction with third-party supplemental needs trusts. These trusts are necessary if you pass down life insurance money or any investments to a disabled person so that the money won’t count against them for asset tests. 

Even if you’re not leaving money yourself, a third-party supplemental needs trust can be helpful if a grandparent or other family member plans to leave your child an inheritance. 

Custodial Accounts Don’t Make Sense for Most American Households

When investing for your child’s future, you’ll frequently hear about custodial accounts like UTMA and UGMA accounts. They typically only make sense if you are already fully funding your retirement accounts, have fully funded your child’s education through a tax-advantaged 529, and have no other avenues for tax-advantaged savings available.

For most American households, they’re only worth exploring if you’ve hit those financial milestones, especially since they can negatively impact your child’s federal grant funding for college. 

Bottom Line

Taking care of your children’s financial future means taking care of your financial future first. Once your bases are covered, you can look into other investment vehicles, like 529s, Roth IRAs in your child’s name, or ABLE accounts.

¹Goal-based saving is a set-aside account, and you will not receive interest or other earnings on the funds within the goal-based account.

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