How to jumpstart your child's financial future

This is Deborah Tice.

The disappearance of her son, Austin,

is one of the biggest missing person cases in the world. "What do you want from me? I should solve the mystery." "I know that my son is somewhere alive." Listen to "Where is Austin Tice?" "From MPRs embedded and BBC Radio 4."

"On the MPR app or wherever you get your podcasts." My nephew's birthday is coming up.

“And I think I'm going to put money in his investment account instead of getting him a bunch of toys.”

"Please do that." You know what? He does not need and his parents do not need is another noisy, flashy toy

that takes up space on the floor that they're going to step on in the middle of the night.

And curse you for. Please do that. And you know, I think it's really common these days. Your circles want to help, you know, grandparents, aunts, uncles, like, I opened Teds 5-9 at the urging of my aunt and uncle who are super financially savvy. They were like, "Please, please, please do this before he's born."

And every single birthday, every single Christmas, on my birthday, they contribute to his 5-9, which I just think is so loving. "Yeah. I think some family members will be relieved to have something." And not have to pick out the right toy or the right, yeah, I can take some pressure off.

“"He already has the dancing cat that repeats phrases. So what else could he need?"”

"I've seen that thing awful." "My dad thinks it's a spy." "Yeah, it's creepy." "You're listening to LifeKit." "I'm Mariel Sagata."

"And I am talking to LifeKit reporter Andy Tagle, who's been reporting on how new parents can build a financial nest egg." "That's right, for their kids." "Andy, how hard is this to do to plan for your kids future financially?" "I mean, it's not hard in the same way, like AP calculus is hard, but it can be very mentally taxing to do this stuff."

"You requires a lot of time and emotional resources to get done right. And you know who is extra extra short on time and emotional resources? Mariel." "You, new parents." "Yeah, new parents." "I guess you're not a new parent, but..." "Yeah, also me. Yeah, I'm out of that new form here in phase." "Which is such a special time for so many reasons." "And it's exactly when you should start setting up those accounts or, you know, at least talking

about these kinds of accounts, but also when you have the perfect excuse to push a lot of these decisions off, right? That's the way one source put it, and it is so true. Totally."

“"I also think, though, it helps to remember that you don't have to do everything at once,”

and that you don't have to set aside a huge amount every month. Because you have a long time horizon, right? If you start contributing in small amounts now, then you've got many years, maybe even decades, for it to compound before your kid is going to tap into it." "Yeah, absolutely. And I think that's an important point. You know, you don't have to be rich to start building up your kid's financial future." This process is possible for a lot of people,

because it's not about wealth so much as follow-through. So, if any of our listeners are becoming parents this year, or are hoping to become parents even in the next couple of years, it's as simple as opening up an investment account, in particular, the 538. It's sometimes called a Trump account. Here's behavioral scientists and professor Wendy Delveros, I have to explain. "There are essentially three money that new parents can claim and start on your journey

of investing for their children for free, essentially, from our federal government. And so claiming that is sort of step one. You can't put money into a account that you don't have." "So that's a good starting place. And often we say, on life get right, it's like

start small, take the first step, and this gets it's like just open the account. The gap between

knowing and doing, you got to do it, and we can help, we can help get you motivated." On this episode of LifeKit, we'll talk more about Trump accounts and other kinds of investment accounts that you can open for your child and how to prioritize between them. That's after the break. Hey, you know that nagging voice in your head, the one telling you to put the phone down and stop doom scrolling while it's time. Look up, take a daily curiosity break with shortwave,

and pair a science podcast. Let your mind wander to the edges of outer space or wonder about what's lurking in the depths of the sea floor all in under 15 minutes. Shortwave, your daily mental reset, listen on the empire app or wherever you get your podcasts. This week on sources and methods behind closed doors at the highest levels of the intelligence community on 9/11. We said you can go if we have to die, we have to die. And how that day is still shaping global events.

Difficult decisions were made. We have short-change totally our soft power. Listen now to a special

You were saying Andy that any parent really can set up their kids for financial success in

“the future. What about if you're in a situation where money is tight?”

Yeah, that's a good question because that's where a lot of people are up right now, right? Um so important caveat before we jump in here, Mariel. We're going to walk through a lot of different

forward thinking savings methods, but all of my sources said the very first step new parent should

take is to prioritize your financial needs. Meaning make sure you're on solid financial footing before allocating anything towards those kid investment accounts. With the exception of the free money from the government. With the exception of that free money, which we're going to get to in just a minute. So pay off your debt, build up that emergency fund, fund your retirement account, and then you can think about turning to those kid investment accounts. A little at a time when you have

money to spare. I talked about a show can be about this. She's a certified financial education instructor, she's the founder of Clever Girl Finance, and she's a mom to twins. She told me that parents

can sometimes get so focused on saving for their children that they can forget about protecting their

own finances. But you don't want to put everything towards your child's future and then end up becoming financially dependent on those kids because you didn't prepare for your own. Okay, so in this episode we're assuming that you do already have those fundamentals covered.

“Now let's talk about our options. What kinds of investment accounts are out there for kids?”

All right, um the Trump accounts. They're also known as the 530A federal accounts. So what's special about this account is that for any U.S. citizens born between 2025 and 2028, the federal government offers a one time $1,000 initial contribution when an account is opened. When he delirosa says

for anyone who's about to become a new parent, this one is a no-brainer. What about parents whose

kids were born before 2025 so they don't qualify for that $1,000 deposit? Is there still a reason for them to open one of these accounts? Short answer, maybe. This account is meant for long-term retirement savings and it comes with a fair amount of strengths. So for one, money can't be with drawn until the child reaches 18 period and withdrawals before they reach 59 and a half are subject to penalties with a few exceptions. Okay, other things to know is you'll pay tax up

front on the money you put in there. If you're employer contributes to the plan that money will be taxed later when you're child withdraws it. In addition to the $1,000 from the government, you and your employer can contribute a combined $5,000 per year. Also, the money in that account will only be invested in low-cost, broad U.S. market-index products. So it's earmarked from very specific investments, which isn't the same with other accounts. So it's pretty inflexible

comparatively. Bullises if your child doesn't qualify for the government's seed money and you haven't started saving for the future yet, other accounts like a 529 or a Roth IRA are likely better more flexible options. If you do want to open it, put it last on your list. All right, let's talk about another popular investment account for kids, the 529 plan. Yeah, this is probably the one most people have heard of. It's a state-sponsored investment account specifically for qualified

education costs. You don't have to go with a state plan, but there are usually incentives to do so. Contributions are after tax, and whoever opens the account, that's usually a parent, but it could also be a grandparent or another relative, indefinitely controls the account. So it doesn't pass on to the child after a certain age. And it's worth taking the time to open one of these because the earnings are tax-free. So if your kid turns 18, you don't have to give them that

money. Nope, it's yours. So you could use it like for your own schooling. Yes, you can change the beneficiary as well. If your kid decides they don't want to go to school, it's also not just strictly college. It can be trading credential programs K through 12. I even read online like it can be

“for qualified expenses like a printer. Dormory MOOC Census, things like, oh, okay. Yeah, because I think”

the fear is that you'll put money into an account that's then locked up in there and you won't have a need for it. Absolutely. If your kids don't end up going to college or you don't want to use it for education expenses, you can roll those funds over up to $35,000 into a custodial Roth IRA account

contributions at any time from a Roth IRA without penalty. So it's not even as the money's not locked

up the same way. It is with like a traditional IRA or a 401k. Exactly. But the 529 account has to have been open for at least 15 years to do that roll over. Yeah, which is another motivation to open that account as early as you can. What other kinds of investment accounts might parents consider for their kids? So next up is two different types of custodial brokerage accounts. The Atma and the Agma or uniform transfers to miners act and uniform gifts to miners act

accounts. Be still with me? I have to say Atma and Agma sound like two trolls under the bridge

“that you have to like solve these riddles three. Do you get where I'm going with this? Yes,”

absolutely. Okay. So our friends at my nugma. They are custodial brokerage accounts and their investment, which means they are investment accounts opened and managed by parents on behalf of a child. You can use them for medium to long term savings. The main difference is that the Atma can include other assets like real estate or art. Unlike the 529 ownership of these accounts transfers fully to the child at the age of majority. So that's 18 or 21 depending on your state.

Contributions are after tax, but investment earnings may be subject to annual kitty tax rates. Okay. So their tax rates are not as high? Yes, exactly. And up my nugma, our troll friends, they are the most flexible because these funds can be used for any purpose at any time. They're not your marks for education. They're not unlocked down until retirement. There's also an element on contributions or the types of investments you can make with these funds, the way

that there is with the Trump account. For that reason, they're also not as tax advantage as the

“other two. Okay. So this is the type of account you might contribute to if you want to help your”

kid down the line with, say, a down payment on a house or paying for a big wedding, something like that. Final option, I'll mention, is a custodial Roth IRA. So similar to the coronavirus accounts. This account is a way to kickstart tax free retirement growth for your little one. Contributions are made with after tax money. However, for the vast majority of brand new parents, this account really won't be relevant because it requires your child to have earned income.

So this is more one to consider a little further down the line, unless your baby is a baby cat model. Yeah, what's income for a baby? Yes, that was a good question. I know here that income is actually a big umbrella. So they don't need to necessarily have a W2 in formal jobs, like babysitting, dog walking. They can count. They can qualify. You just need to double check with your financial institution because proof of income can vary depending on the institution.

After the break, we talk about how to prioritize between needs accounts because parents understand. Yeah, you can't do it all. Yeah, especially not all at once. Support for this podcast and the following message, come from Rula. With Rula, finding a therapist and getting the help you need is easier than talking yourself out of it, because Rula offers personalized, cost estimates and has no hidden fees. With sessions

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and take the first step. So we talked about four different kinds of investment accounts.

It's a lot to think about how can parents start to prioritize. So first off, you don't have to open an account just because it exists. Bullet told me it is absolutely okay to start with just one

“or two that align with your goals and contribute what you realistically can. The important thing”

here is just to get started as soon as you can. You know, like if college is a goal for your family, if that's something you have on the horizon, open that 529. As we said earlier, time is money, and when it comes to these kid accounts, we mean that very literally because of content interest. Listen to Chris you it. He's a dad of two author of the book you are now the CFO of a very small family, and he is the like-it-listener who pitched us the story idea. Thank you, Chris.

50 bucks here, 100 bucks there. Over time, at average returns of 7 to 8 percent can actually make

a very large impact over the course of 10, 15, 20 years, and provide, you know, a welcome financial uplift for your children in the future. And I mean, at the same time, you can only do what you can do, but like if you just are not doing it because you're like, I'll get to that. Right, you know, that's a silly reason to not. Yeah. If you're feeling ambitious and you did want to open all four

recommended. So, if you're a new parent who feels compelled to open every single one of these, and you have the means to do so. It's a few different lines of thinking here. For Bola, the PEMDAS, to max out your child savings, is to start with that free $1,000 in a Trump account, then put money into a 529 plan up to your state's deduction limit for tax-free school savings. After you hit that limit,

use a custodial account, not my or Agma, for flexible cash to cover milestones like a first

car. And then finally, open that standard Roth IRA, the second your kid starts earning income,

“to kickstart the retirement. That's how she would do it. Besides these kinds of investment accounts,”

is there anything else that parents should be thinking about in terms of setting their kid up for financial success? Yes, there is actually all the experts I talked to suggested focusing on the same general buckets in the same order. Life insurance, wills and guardianship, and then child savings accounts. So, you can do all of those at once, but if you have limited time and energy, first of your life insurance, then your will, then child investment accounts. You know, at the end

of the day, I feel like this is really about giving your children the gift of freedom. Like,

for a lot of us who didn't graduate with an investment account in hand, it's a really beautiful idea to think that you could put away some money, even a small amount, little by little, so that

“your kid's life is easier than it would have been otherwise. Because a lot of people, if they don't”

have a safety net, or they don't have any savings, they stay in jobs that are really a bad fit, or they really hate what they're doing, and they don't leave because they can't. And I like the idea that my kids would have some choice. The gift of options, the gift of choice. Yeah, that's really nice, yeah. Bola had a really nice sentiment that I want to leave you with. She said, one thing

I always remind parents is you don't have to have everything figured out financially, all at once

the moment your child is born. Just start with what you can afford and build from there. Because as much as we want to give our children every possible advantage, taking care of your overall financial stability is also part of taking care of your children, which I thought was a really nice way to think

“about it. Yeah, it's like put on your own oxygen mask first. You know, and then keep building from”

there. Andy, thank you so much for this. Mario, thank you. Okay, time for a recap. Take away one. Sometimes parents get so focused on saving for their kids that they neglect their own finances. Don't do that. Pay off your debt. Build up your emergency fund and contribute to your retirement account. Because you deserve financial security. And because if you don't prepare for the future, your kids may end up having to take care of you financially. Take away two. If you have a baby

born between 2025 and 2022, sign them up for a 530A investment account, also known as a Trump account. They'll get free money. A thousand dollars from the government that you can invest in index funds and watch grow over time. They count when transferred to them when they turn 18, but it's meant for retirement. So they'll pay fees on this government money and the profits if they would draw it before age 59 and a half with some exceptions. Take away three. Consider a 529 plan.

It's a state-sponsored investment account for qualified education costs. And you don't have to have a child to open one of these. You can make yourself or another family member the beneficiary and then change the name once the baby is born. You also don't have to be the parent to open one. Take away four. Meet, utma, and utma. Two types of custodial brokerage accounts for kids. Ownership transfers to your kid at 18 or 21 depending on the state. They may pay taxes

on earnings. This account is not as tax advantage as the others, but as a result it's more flexible. So it can help your kid with medium term savings. If they want to buy a house or a sort of business or pay for a wedding. Take away five. The custodial Roth IRA is a retirement account similar to the regular Roth IRA. Contributions are after tax and you can withdraw them anytime. Growth is tax-free once you hit retirement age, but you can only contribute money to this that your child

has earned. All right, that's our show. If you love life kit and you want even more, follow us on Instagram @NPRLifeKit. There you'll find videos featuring our favorite tips and comics on topics

@NPRLifeKit. This episode of LifeKit was produced by Sylvie Douglas. Our digital editor

“is Malaga Greve and our visual editor is CJ Rikalan. Megan Kane is our senior supervising editor”

and Lauren Gonzalez is our executive producer. Our production team also includes Claire Marie Schneider,

Margaret Serino, and Lenin Sherburn. Engineering support comes from Sina LaFredo. Fact checking by

Andrea Lopez Grousalo. Special thanks to Mandy Woodrow Santos for her input on this story.

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