1. Open a 529 plan
University is not getting any cheaper. A good way to pay is to withdraw money from a 529 plan. Although 529 plan contributions are not tax-exempt, once funded, these accounts can grow tax-free. Withdrawals are also tax exempt as long as they are used for qualifying education expenses (which are not limited to college; you can also withdraw funds from a 529 to pay for private school). Additionally, some states offer their own financial incentives to open a 529. Check out the benefits available where you live.
2. Open a custody brokerage account
Teaching your kids how to invest early is one of the greatest gifts you can give them. If you open a deposit account in their name (instead of buying stocks for them in your own account), they’re likely to be even more excited. Once you have an account in place, teach your kids how the stock market works and help them identify companies that are a good fit for their individual portfolios. Your kids will likely prefer brands they know and love, like Disney (NYSE: DIS), and there is nothing wrong with that.
3. Open a Roth IRA
Most of us recognize a Roth IRA as a retirement savings vehicle – not exactly the sort of thing a teenager is likely to enjoy. But there are plenty of good reasons to open a Roth IRA for your kids this year.
The advantage of saving in one of these accounts is that you can technically withdraw your major contributions at any time without penalty, so your children can use their accounts as a source of additional income as needed. Roth IRAs can also serve as a college savings tool. If your kids have expensive hopes for higher education, you better consider one. There are no age restrictions on contributing to a Roth IRA, but your children must have earned income to fund one. This income can come from part-time employment or even from concert work which is reported as taxable income.
Let’s face it, your kids might be a lot more excited about unboxing a video game or a new cell phone than they are looking at a pile of documents showing their names on one of these accounts. But opening a 529, brokerage, or Roth IRA account in their name ultimately gives them even more freebies: future financial security and the ability to achieve the various goals they’ve set for themselves over time. They may not immediately recognize the importance of this gift, especially if they are younger, but over time they are likely to appreciate it tremendously.