Opening a savings account in a child's name may seem like a great way to give Junior a head start on a lifetime
of thrift. However, it can come back to haunt families, especially when college years roll around.
In fact, choosing the wrong savings vehicle for your children's future college cash needs could cost them thousands
in avoidable taxes and missed financial aid.Because financial aid is determined based on income and assets from the
year prior to applying for aid -- in most cases, the student's junior year in high school -- students with large
amounts of savings in their name could end up losing a hefty sum of free college cash.
Fortunately, there are several ways for parents to save that will not put their child's future financial aid at
risk. The following are 3 places to safely stash the cash:
College Savings Plans of Maryland
The College Savings Plans of Maryland is the easy, affordable and smart way to save for your child's
education at nearly any college in the nation. Starting to save now is the best thing you can do to support their
success in 5...10...or 18 years. We offer two distinct and flexible plans that will help you accomplish your goals
and help give your child a head start. Also, they’re the only 529 plans that offer a Maryland State income
deduction for Maryland taxpayers. Remember, whether you are interested in the Maryland Prepaid College Trust or
Maryland College Investment Plan, as little as $25 per month can get you started. It’s never too early or
late to have a plan.
UGMA and UTMA accounts
If the child doesn't plan to attend college and therefore isn't at risk of losing financial aid, UGMA
and UTMA custodial accounts offer decent tax breaks for children under the age of 18.
In these accounts, the 1st $1,000 in gains is tax-free, the 2nd $1,000 is taxed at the child's income tax
rate and the remainder is taxed at the parent's income tax rate, according to the IRS. Plus, there are no
restrictions on how the funds may be used as long as they directly benefit the child.
The downside of UGMA and UTMA accounts is that parents have less control over how the child eventually spends
the money, says Michael Kay, a CFP professional and president of Financial Life Focus, a financial planning firm in
Livingston, New Jersey.
Finally, parents can give their kids a financial head start by opening a Roth IRA in the child's name once
the child starts earning income.
While children over the age of 18 retain control of the account, restrictions on Roth IRA withdrawals prevent
investors from taking earnings out penalty-free until the age of 59 1/2.
However, there are exceptions to this rule that allow early withdrawals due to certain circumstances (hardships
such as a disability) or for certain types of spending (such as purchasing a 1st home or for qualified education
A trust in the child's name is another option for parents concerned about how their kid will blow the dough.
However, these plans come with legal and administrative fees parents won't encounter with a Roth IRA.