Trust Funds & Savings Accounts for a Child

Many available options enable you to build savings for your child.
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The cost of raising a child from birth to age 18 for a middle-income family is $234,900, according to the U.S. Department of Agriculture. Even when broken down to the roughly $35.75-per-day cost, parenting can strain your financial resources, especially when you have more than one child. But don’t despair. Trust funds, savings accounts and educational savings accounts offer you the tools you need to build a strong financial foundation for your child.

Time, Not Money Will Grow Your Savings

If you open a savings account when your child is born and contribute $50 a month at 0.95 percent interest a year, compounded monthly, at the end of 18 years you will have saved $11,818.90. If you wait until he or she is 5 years old, you would only save $8,355.18. Interest rates at the time of publication are next to nothing, so it may seem futile to save, but shop around: You might find some good deals out there.

Trust Funds

Accounts in which you set aside money or other assets for your child are referred to as UGMAs or UTMAs, after the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act. These trust funds allow a parent to serve as trustee of the account, but any withdrawals must be for the benefit of the child. When your child is 18 or 21, he may have access to the money.

Education Savings Accounts

Education saving accounts, also known as 529 plans, offer tax-deferred savings accounts specifically for expenses related to college education. They are sponsored by states, state agencies, or educational institutions, and are authorized by Section 529 of the Internal Revenue Code. They offer two options for saving: prepaid plans and college savings accounts. The prepaid plans allow families to buy tuition units at certain colleges and universities at current prices. Assuming college costs continue to increase, this could be a great savings. A college savings account is more like an IRA. The money can be used tax-free for any expense related to college education.

Lessons for a Lifetime

As your child grows, it is also a good idea to include her in the savings efforts. Start by opening a separate savings account for her at your local bank. Take her with you and have a banking professional explain how the savings account works and what the bank does with the money. Encourage your child to contribute to the savings account quarterly or monthly. As the money grows, set goals for how much she needs to save to purchase a special item. When she is old enough to understand how savings works, you can let her know about the nest egg you’ve set aside for her. Children whose parents have saved are more likely to be savers.

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