(WYTV) – Even though money is tight for everyone right now, some parents and grandparents are trying to make sure the young ones in the family have some money when they grow up or maybe a place to store that birthday money.
In most cases, accounts are set up for children who can’t work. So a parent needs to establish custodial ownership and then decide what kind of account they want.
“Are we doing a college account are we doing something that we want to deposit birthday money…Different things like that so really you’ve got to think about what the intention of the account is first,” said Chris Mediate, President at Mediate Financial.
Mediate has over 25 years of helping people manage their finances.
One of the most important things chris told me is there’s no one size fits all plan that works for everyone. What you need to do is consider your own personal goals first and then pick the best plan that works for the goals you have for your child.
“If it’s short term we’re just depositing birthday money and Christmas money,” said Mediate.
And whoever is tied to the custodial account is on the hook to pay taxes if it gets to big.
“So we have to be very clear if we set up a custodial account that’s in their social security number that child owns it,” said Mediate.
There’s also long term savings options like Roth IRAs, which Mediate says he’s been asked about a lot lately.
“The problem with structuring a roth that your child would own…The rules state that your child has to have working income in order to start a Roth,” said Mediate.
Another thing to consider is if your child might go to college.
“You want to be careful with the type of account you’re setting up for college or I should say any type because money in a child’s name counts much more heavily in a financial aid system,” said Mediate.
When it comes to college a 529 Plan is a common route but you have to pay a penalty and tax on earnings if your child doesn’t go to college, but if they do, it grows tax free.
“I want to set up a college fund but I don’t want to designate it as a college fund. Those are called custodial accounts. Now that money is in their name until their 18 or 21. Now the advantage is if they don’t go to college that’s ok, they own it. Now remember this, they get to control that money at age 18 or 21,” said Mediate.
And that’s what it pretty much boils down to. There’s many options out there. It’s best to make an educated decision about what’s best for you and as Mediate says be intentional.