Savings Options for a Child Who Is Not Going to College

One of your primary responsibilities, when you welcome a child into the world, is preparing them for adulthood. Of course, you feed them, clothe them and house them. You make sure they have a good education, and you instill them with a solid sense of right and wrong.

Many families, though, want to go a little further and save for the time a child enters adulthood. These savings will often be in the form of a college fund, but that’s not the only choice. There are ways to prepare for a child’s wedding, their first home, or even a mission trip overseas. The direction you take will depend on your resources, your location, and the likely end use for that money. Last week we discussed your options for college savings. This week we will look at savings for other purposes.

Saving for Expenses Other Than College

The traditional vehicles for college savings generally require that the money goes toward qualified college expenses with an accredited institution.

But these are not the only major expenses faced by young people as they go into the world. We can’t begin to come up with a comprehensive list, but it might include things like the following:

• A daughter may decide against college and instead need money for a wedding and to set up a household.
• A child may want to go to a faith-based school that is not accredited, or they may need the money for an overseas mission trip.
• You may want to have money to help a child put a down payment on a home.

If there’s a good chance the money won’t go toward college, you have two main options. My favorite and the first option is an account under the Uniform Transfer to Minors Act, or UTMA. When you put money into this account, the child can take it out when they turn the age of majority which is dependent on your specific state’s definition.

The danger with a UTMA account is that the growth is taxed under the kiddie-tax rules. Depending on the size of the account and the investment choices some may be put off by the kiddie tax. To counter this, consider your second major option, a permanent life insurance policy.

Handled correctly, this policy may provide a tax-friendly environment. But it must be approached in the right way.

When most of us purchase life insurance, we want the highest possible death benefit with the lowest premiums. When you’re saving for a child, though, you flip this strategy, taking the lowest possible death benefit and the highest possible premiums. The goal is the fund the policy just under MEC.

Let’s say that you as the parents want to pay $300 a month. As long as we act according to the rules, the money value of that policy grows tax-favored. Then, once the child reaches 18 to 20, there’s a pool of money they can loan themselves tax-favored. The money can go to college, but it doesn’t have to. (There are many more details on this idea/concept than one post will allow. This is just an introductory post to this planning strategy.)

The bottom line here is that you can save for your child’s adulthood even if they’re not likely to go to college. At Financially Simple, we’re committed to helping you give them the best start possible. In such, knowing all of the possible savings strategies affords our clients the information they need to make an informed decision.