Research from Purdue University suggests that many of our financial habits are set by age 7.
One of the best ways to ensure your child has a bright future is to help them develop good money
management skills early on in life. There are many things you can do to help set your children up for
financial success, and the earlier you start, the better. If good habits aren’t formed early, it becomes
harder and harder to point your kids in the right direction.


Let’s discuss four financial assets that can help you kick-start the process of building a financially secure
future for your children.

Open a UGMA account

The Uniform Gifts to Minors Act created the UGMA account in 1956. This account is set to be highly
flexible and let parents, family, and friends give financial gifts to children without giving the minor full
control over the money.


The account is in the child’s name, but the parent is the custodian and controls how the money is
invested and spent until the child hits the age of majority. In Colorado, the child gains full access to the
account and the assets within it at the age of 21.


Pros

  • The asset will become the child’s, and it can be a great way to get kids interested and involved in
    investing, business, and money management as young adults assuming they are ready for that
    responsibility.
  • Unlike other types of investment accounts, the UGMA funds can be used universally, not just for
    education.
    • Fun fact: One of our clients got a UGMA for their child. Their child was a fan of Nike, so
      the child could invest directly in the brand as an investor. This made the child interested in
      Nike’s earnings, product development, and business dealings, furthering their financial
      acumen at a young age.
  • There are no limits or rules on how much can be contributed to the child’s account.

Cons

  • The money earned via a UGMA account is considered unearned income. The first $1,100 will be tax-free and the next $1,100 will be taxed at the child’s tax rate, but the benefit will end after that, and the unearned income will be taxed at the parent’s tax rate.
  • Once the UGMA becomes the child’s asset, the parent has no control over the money. If you have a wild child, this could be bad news.
  • Assets are considered when evaluating a financial aid application. Having a UGMA may be deemed a disqualifying asset as colleges will most likely expect the child will use part of the funds to pay for school.

Open a College Savings Account


One of the most important aspects of your child’s future is their education. The cost of college has been
rising steadily for years, so it’s important to start saving as early as possible. This can be done through a 529 Plan. A 529 Plan is a state-sponsored tax-advantaged way to invest toward the cost of education by
contributing money to an account that is invested in stocks and bonds, typically through mutual funds.


Pros

  • The earnings are tax-deferred, and withdrawals are tax-free if they are used for qualified education expenses.
  • The funds are transferrable from one child to another family member.
  • The beneficiary can still qualify for loans and grants, as the 529 Plan is the parent’s assets.
  • In Colorado, there is a state tax deduction regardless of your income bracket.

Cons

  • Funds must be used to finance qualified education expenses only (like tuition, textbooks, computers, room, and board, etc.). You’ll be subject to a 10% penalty for withdrawals to cover ineligible expenses.
  • Some plans have higher minimum contribution requirements. For example, in Colorado, the minimum initial contribution is only $25, while in Arkansas the minimum is $500.
  • State-sponsored plans allow you less control over managing the plan. So your access to a wide breadth of investment options may be limited.

Utilize a Permanent Life Insurance Policy for Your Child


While this may not seem like an obvious way to set your children up for financial success, or even seem
like an unnecessary expense at the time, getting whole or universal life insurance policy can be a great
way to help your children.


Take out a permanent life policy on your child and pick an amount where you can maximize the cash
value. You will make contributions for the life of the policy (or a stated period) and in the future, the
child could take that money out on a tax-free basis. The best strategy is to maximize the cash value
growth of the policy while limiting the cost of insurance.


Pros

  • Since you are insuring the child’s life (not the parents), the policy premiums tend to be cheaper, providing a lower cost of insurance, thus increasing the potential for greater cash value growth.
  • In the unfortunate loss of your child, the death benefit from a life insurance policy can be used to cover things like funeral expenses and outstanding debts.
  • If you don’t claim the death benefit, the child can access the money and use it to pay for college tuition, a down payment on a house, or anything else.

Cons

  • It could be a disqualifier if your children apply for loans and grants.
  • Life insurance policies build cash value at a lower rate of return, typically, over the long term.
  • This can be a limiter to the upside growth of the money.
    • Note: In general, minor children should not be named as the beneficiary of a life insurance policy. You should consult with an estate planning attorney to establish a trust to name as a beneficiary if that fits in your plan.

Minor Roth IRA for Children Earning Income


Most people associate retirement savings with 401(k)s and traditional IRAs, but kids can start saving for
retirement too. By the time your child is 7 years old, they could qualify for a Roth IRA if they work for the
family business or have earned income from babysitting, mowing lawns, or any other type of work
permissible under child labor laws.


Pros

  • It offers tax-free growth and there are no required minimum distributions.
  • Withdraws that are federally tax-free if the account has been open for at least five years and 59.5. However, there is an exception to early distribution penalties, if the funds are used for eligible educational expenses, first-time home buying expenses, and eligible medical expenses the funds can enjoy the same tax-free withdrawals. This is a huge advantage over Traditional IRAs.
  • Investments available in a Roth are broad and can incorporate high growth strategies for long term wealth building.
  • Starting a retirement plan this early could result in 10x the value of the account by the time of retirement.

Cons

  • Your child will have to wait until reaching the age of 59 ½ to utilize that money without restrictions.
  • You can’t contribute to your children’s Roth IRA unless they have earned income.
  • The limit to a Roth contribution is $6,000 (2022), which might limit the amount of money you’d like to save for them.

Bonus Option: Set up a Savings Account

A savings account is a great way to start teaching your child about money management. It provides a safe place for them to deposit their money, and it also allows the money to earn some interest over time.

Pros

  • This can be a great way to help your child learn about banking and financial responsibility.
  • You can contribute their allowance, cash gifts from relatives or on big occasions like birthdays or graduations.
  • There are many options with no maintenance fees and no minimum balance requirements.

Cons

  • Growth on a kid’s savings account will be muted due to low-interest rates and limited growth potential, so you must make sure the contributions being made are helping you and your kid achieve the financial goals set.

Teach Them about Spending and Budgeting

Another important aspect of money management is learning how to spend and budget wisely. You can
help your children learn these skills by giving them an allowance they have to budget each month,
teaching them about “need vs. want”, and taking them shopping with you so they can see how you
make spending decisions and understand the value of a dollar.


You may also teach them about investing and how to grow their money, help them understand the
banking system, and even share lessons you may have learned from managing money poorly. Just don’t
forget to explain how you recovered by making informed financial decisions!


The Takeaway


There are many ways you can help set your children up for financial success, but the bottom line is that
you should lead by example. Show them that you are mindful of your own finances and make sound
decisions with your money. This will help them to understand the actions you are taking for them now,
and how you can work together to set and achieve their own financial goals.


If you model good money management habits, you’ll give your children a strong foundation for financial
success. And that’s a gift that will keep on giving for years to come!


If you have questions about financial planning for your children’s future, feel free to reach out to me
directly. As a Certified Financial Planner, our team at Four Points Wealth has helped countless families
grow their financial foundation, build wealth, and set their kids up for a bright future, and we take our
role seriously in helping you do the same.