Our previous installments in the Phippen Tax Financial Accounts Series have discussed a wide array of accounts to improve your financial health. This article will focus on the financial health of your children. If you have one or more kids now, plan to have them later, or even just have kids in your life that you care about, this article is for you.
Checking and savings account
Just as the checking account is the money landing strip on your financial runway, so it is with your child(ren) as well. Most banks and credit unions will have no-fee options designed specifically for children or students.
A child needs a checking account for the same reasons you do, albeit on a much smaller scale. Opening a checking account for a child, with you as the co-owner, gives you an opportunity to teach them basic financial principles. Back-to-school clothes shopping, for example, is a natural conversation starter about budgeting. Rather than simply signing your child up for Little League, you can have them “earn” the money (by taking out the trash or doing the dishes) and then pay the fees themselves.
Of course, do not give a young child access to a debit card (although you might consider it for a teenager to some extent). As Xa pointed out earlier, making it difficult to spend money is a small hack that you can employ to increase savings.
So too it is with a savings account: give your child the opportunity to set savings goals and accomplish them. Do they want a fancy new video game system or tickets to a Taylor Swift concert? Let them earn the money over time and watch their savings grow, both with additional contributions and interest.
If you own a business, you can take this to a more extreme level, and potentially realize some tax savings, by adding your child to the company payroll. Once the child is earning income, they can even open an IRA. Contact me to discuss!
You can also have a separate high-yield savings account in just your name that is a child-focused goal, whether not-fun-but-necessary (braces) or more extravagant (used car for a teenager).
529 account
A “529 plan” is a tax-advantaged account that can be used to pay educational expenses. You set this up with you as the owner and your child as the beneficiary. Contributions are not deductible at the federal level—you may be able to deduct them on your state return—but they grow tax-free in the account, and distributions are not taxable when used for qualifying purposes. You have a range of investment options according to the brokerage that maintains the account. In this sense, a 529 account functions very much like a Roth IRA but for educational purposes.
You, or anyone else, can make recurring or one-time contributions to the account over time. For little ones who already have more toys than they could possibly need and will not remember what you might get them anyway, consider making a contribution to their 529 account rather than buying another toy, or buying a small treat and making a larger contribution.
For example, my youngest brother set up 529 accounts for each of his two children soon after they were born. The money in each account is invested in a target-date mutual fund. He and his spouse make recurring monthly contributions to each account, and he provided links so Xa and I can contribute to their accounts for Christmas and birthday gifts. It may not be much, but every little bit helps. With the power of compounding growth, a little bit now will be a lot by the time our niece and nephew finish high school, giving them more options for postsecondary education.
Once you decide to set up a 529 account for a child in your life, there are many considerations to weigh (such as where to open the account, choosing investments, etc.), but there is no need to get overwhelmed. I can help you through this!
One consideration is choosing the account owner. Usually this is the parent. However, if feasible—and this is an “if” the size of Alaska—it is advantageous to have another trusted person open the account. College financial aid formulas consider assets of the student and parents, but not others.
Credit card
This one will probably raise a few eyebrows. Yes, your five-year-old should have a credit card.
No, I am not suggesting that you hand your Mastercard to a young child; you do not need the 200 chocolate bars, 25 lego sets, and giant stuffed Pikachu that would inevitably arrive at your door. Instead, simply add them as an “authorized user” to your existing account and cut up their physical card once it arrives in the mail. Since you still use the account, it will not become dormant.
You might consider a small-limit credit card for a responsible teenager. As with checking and savings accounts, many banks and credit unions will offer student options. The bank where the child’s checking and savings accounts are located is a great place to start.
Why do this? Being an authorized user allows your child to begin building a credit history. Your consistent, on-time payments with this card will benefit your child with no extra effort on your part. (The reverse is also true: if you default on this card, it will harm your child’s credit history.) As we discussed previously, lack of a credit history can result in myriad obstacles. What better high-school graduation gift than a stellar credit rating? Adding your child as an authorized user is a simple, one-time step you can take that will give them a significant leg up on life down the road.
Life insurance
Nobody likes to think about this, but you need to have a basic term life insurance policy on your child in case tragedy strikes. Unfortunately, death is expensive. (Just do a Google search for “average burial costs”—you may be shocked at the results!) We have all seen the GoFundMe requests for help with expenses when the worst happens unexpectedly.
A term policy is the lowest-cost option because if the insured outlives the policy, then the beneficiary receives no payout. It may not be much, but it will give you peace of mind. Your employer might also offer low-cost options to cover your family members.
Additionally, if anyone else depends on your income and you have not amassed enough wealth for them to survive off of your other accounts indefinitely, you should have a life insurance policy covering you so that if the Grim Reaper visits, your loved ones are not left adrift.
There are also other steps you should take to make sure your family, particularly your children, are protected in the event of your demise. I would be honored to help you formulate or update your estate plan.
These are the basic accounts your child needs for their financial well-being. Get them started on the path to financial well-being today!
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