This is the most exciting topic for me as a new parent because after several years of financial research for our own financial futures, we now get the opportunity to setup our baby girl for a financial independent future as well. People talk about the rewards of having kids & the hopes that they experience things in life you didn’t get the chance to do while growing up.
I’ll spare you the details of why this is important to me (but they will be in our book coming soon one day). Let’s just say, we want her to be a kid for as long as possible without the added stress of having to grow up quickly and ‘get to work’. Rest assured, when those days come, her mom & I will have laid the foundation.
And it all starts with either of the two accounts above…
Both have their pros and neither have any cons in my opinion, Because if you are saving for your child’s future in either account, it’s a win/win. With that said, let me highlight both accounts & why we tend to favor one over the other.
Custodial Brokerage Account:
> Greater Flexibility, no withdrawal penalties, can be used for college expenses, etc.
> Ability to invest the funds into exchange-traded funds (ETFs), mutual funds, individual stocks, & target date funds.
There’s is one downside with a Custodial account…
> Any realized growth (when you withdraw funds from the account) or dividends may be subject to income taxes.
The two main reasons above are why we’d choose a Custodial account over a 529, with that said a 529 is also great but limited in my opinion…
> Tax advantaged when used for your child’s educational expenses.
> In addition to tax-free growth, certain states may also let parents deduct contributions from their taxes.
But here’s the biggest limitation of 529s…
> 529 funds used for non-educational expenses may be subject to income taxes and a 10 percent penalty.
> With 529 Plans, you can only invest in a limited number of funds like target date funds. While this works for the majority, we prefer more options to invest in like ETFs.
Regardless, it doesn’t take much to invest in your child’s future.