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Top Strategies to Secure Your Child's Financial Future By: Stock Market Charlie
- Stock Market Charlie
- 4 days ago
- 9 min read
Key Takeaways
Parents and guardians have an exciting opportunity to help their kids build thriving nest eggs and gain valuable financial knowledge!
By strategically utilizing tax-advantaged accounts, your family can cultivate excellent habits and achieve long-term financial security!
Helping teens and adult kids start saving for their future is crucial for building a secure financial life. By teaching them financial literacy, they can learn about budgeting, saving, investing, and credit. Setting clear savings goals using the SMART criteria can motivate them to save for specific targets. Opening a savings account with a good interest rate introduces them to earning interest and managing their money. Encourage regular contributions to their savings from allowances or earnings, and discuss the importance of an emergency fund to handle unexpected expenses. Once they understand saving, introduce investment basics like stocks and bonds. Lead by example by sharing your own financial experiences. Celebrate their savings milestones to motivate them further. Finally, engage them in long-term financial planning, such as retirement savings. These strategies empower them to take control of their financial futures, providing more opportunities to achieve their dreams and handle financial challenges confidently.
1. Exciting HSA Opportunities for Everyone!
Health savings accounts (HSAs) offer incredible features that can empower young people to supercharge their savings early on! Here's the thrilling part: An HSA provides a triple tax advantage that can't be beaten! Enjoy tax-deductible contributions, potentially tax-free earnings growth, and tax-free withdrawals for qualified medical expenses.
To jump into the HSA game, you need to be enrolled in an HSA-eligible health plan, also known as a high-deductible health plan. The IRS sets the contribution limits each year, and these limits vary based on your health coverage.
HSA Contribution Limits
Exciting news for young adults! They can stay on their parents’ health plan until they turn 26. However, many of them are already stepping into independence, supporting themselves, and paying taxes. If you can't claim your adult child as a dependent on your taxes, you won't be able to use your HSA to cover their qualified medical expenses. But don't worry, there's a fantastic alternative!
Good news: Here’s the bright side! Your nondependent child covered by your HSA-eligible health plan can open their very own HSA and contribute up to the family limit too! Anyone, including parents, can contribute to an HSA on someone else’s behalf. Imagine making a contribution to your adult child’s account! Just remember two things: You can’t use pre-tax deductions from your employer’s payroll for your child’s account, and you won't get a tax deduction for the contribution—but your child can claim it! How awesome is that?
See how HSA balances could grow with time and discover potential tax savings!
2. Save in a Roth IRA at any age
Starting to save for retirement before even launching a career? Absolutely! It's a brilliant move, especially with a custodial Roth IRA. If your child, regardless of age, has earned income from work, whether formal or informal, they can contribute to a Roth IRA. For those under 18, consider opening a custodial Roth IRA, known as a Roth IRA for Kids with your brokerage. Once your child reaches adulthood (age varies by state), simply transfer ownership of the account. It’s that easy!
Benefits of a Roth IRA. Contributions to a Roth IRA are made on an after-tax basis, and the potential earnings can be withdrawn tax-free in retirement as long as certain requirements are met. How fantastic is that?
But wait, there’s more! Besides retirement, there are other exciting ways to use the account. For example, buying a home for the first time may qualify for tax- and penalty-free withdrawals of up to $10,000. Plus, contributions can be withdrawn at any time, without taxes or penalties. What a great opportunity!
Get excited about the power of investing and compounding to grow your money! However, always keep in mind that investing carries risks. There’s a chance you could lose money, and investment returns can fluctuate. Regular investing doesn’t guarantee higher profits. These are just hypothetical examples and don’t represent the performance of any specific investment. These illustrations assume no withdrawals and continuous saving throughout the entire period shown.
Imagine the journey of an early saver! This scenario assumes: (1) A $500 contribution is made every January 1 from age 13 to 67. It doesn’t factor in the SECURE Act 2.0 indexing of catch-up contributions, implemented on January 1, 2025. (2) An annual return rate of 7%, and (3) the ending values don’t account for taxes, fees, or inflation. If they did, the amounts would be lower. Remember, even with a 7% return, there’s a risk of loss.
Now, envision the path of a later saver! This example assumes: (1) A $500 contribution is made every January 1 from age 25 to 67, (2) an annual return rate of 7%, and (3) the ending values don’t account for taxes, fees, or inflation. If they did, the amounts would be lower. This is for hypothetical illustration only. Investing involves risk, including the risk of loss.
3. Embrace the Power of 529s and 529 to Roth IRA Rollovers!
Helping kids leap into adulthood without the burden of debt is a top priority for many parents. A fantastic way to achieve this is through a 529 savings plan! 529 savings plans are incredibly flexible, tax-advantaged accounts crafted specifically for education savings. These plans can cover a wide range of qualified education expenses, including costs for K–12 schools up to $10,000 ($20,000 starting in taxable years after December 31, 2025), apprenticeship programs, vocational schools, and even student loan repayments (with a $10,000 lifetime limit).
Time is your ally when saving for a child’s education! By starting early, you give your money the best chance to grow and flourish over time through smart investments.
Early Birds Reap the Rewards!
Investor 1 kicks off their savings journey by investing $3,000 annually in a 529 plan right from their child’s birth.
Investor 2 begins their savings adventure by investing $3,000 annually in a 529 plan when their child turns 10. To match the outcome of Investor 1, Investor 2 would need to save approximately $6,700 each year.
Imagine this exciting scenario: (1) making annual 529 contributions every January 1st for the number of years indicated, without any withdrawals until year 18, (2) contributing $3,000 each year, (3) enjoying an annual nominal return rate of 5%, and (4) benefiting from no taxes on any earnings. Remember, the ending values don't account for taxes, fees, or inflation, so they could be lower. Past performance is no guarantee of future results, but it's thrilling to consider the possibilities!
Get excited about 529 plans! When you make contributions, they're after-tax, but the real magic happens when you use those earnings for qualified education purposes—they can be withdrawn completely tax- and penalty-free! While the federal government doesn’t offer a tax deduction for contributions, many states do allow you to deduct them from your state income tax, adding even more value to your investment.
If you decide to use the funds for something other than qualified education expenses, keep in mind that withdrawals of earnings will incur a 10% penalty and taxes. But don’t worry, your contributions are after-tax and won’t be penalized if you need to withdraw them.
Some parents might hesitate due to the possibility of penalties, but here's the exciting part:
You can change the beneficiary to another family member, keeping the educational dreams alive!
In certain situations, you might even be able to roll over assets from your 529 to a Roth IRA for the beneficiary, opening up even more opportunities!5
The law now allows for up to $35,000 to be transferred to a Roth IRA over a lifetime, subject to the annual contribution limit. But before you jump in, consider these important points:
Your 529 plan must have been maintained for at least 15 years for the designated beneficiary. (And remember, the Roth IRA must be in the name of the 529's designated beneficiary too!)
The amount you transfer, combined with other IRA contributions for the year, must not exceed the Roth IRA’s annual contribution limit for the beneficiary.
Additionally, ensure that the transfer comes from contributions made at least 5 years ago, and remember the lifetime transfer cap of $35,000 per beneficiary.
Always consult a financial or tax professional to tailor these strategies to your situation. Remember, transferring your 529 assets may result in a gain or loss.
4. Building credit
A stellar credit score can open doors! It influences much more than just borrowing costs. From insurance rates to securing an apartment, your credit score plays a pivotal role.
Boost your teen’s credit by adding them as an authorized user on your credit card. At Fidelity, teens 13 and older can join the card, helping them build credit while you remain responsible for the bill. Plus, all that available credit is reported to major credit bureaus, setting them up for success!
Remember, your authorized user will get their own card, but you’re the one making the payments. The upside? You’ll enjoy any rewards or cashback from their spending if you use a rewards card like the Fidelity® Rewards Visa Signature® card.
5. Build strong money skills with Fidelity Youth® Account
Saving and investing for both short- and long-term goals is a crucial life skill. Empower your teens by putting them in control of their finances!
The Fidelity Youth Account is a teen-owned brokerage account for those 13 and older, allowing them to invest independently with parental guidance.
Fostering smart financial habits early can lead to significant rewards and long-term security.
6. Consider custodial accounts for children’s money
Custodial accounts offer a fantastic way to invest money gifted, earned, or inherited by minors. Any adult can open one for a child, and the funds must benefit the child. When they reach the age of majority, they gain full control over the assets.
These accounts, often labeled UGMA/UTMA, are taxable brokerage accounts without contribution limits. They offer tax advantages, such as exemptions on a portion of the earnings. (In 2025 and 2026, $1,350 of a child’s earnings may be exempt from federal income tax, with an additional $1,350 taxed at the child’s lower rate.)
The flexibility is a major perk: custodial accounts can be used for anything that benefits the child.
Set the next generation up for success
Small steps today can lead to big achievements tomorrow! By modeling good financial habits and involving your kids, you can set them on a path to future success. Discuss the importance of saving and investing, and provide opportunities for them to learn money management before they face adult responsibilities. Fidelity Learn offers a wealth of resources for young people, including a section on Personal finance for students.
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Best Regards,
Stock Market Charlie
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