If you're focused on planning for your child's future, socking money away into a regular savings account is a good place to start. The only downside is you're not going to earn a ton of interest on what you're saving. Investing the money can yield a better return and certain types of investment vehicles even offer some tax advantages. Let's take a look at a few investment options for parents.
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1. 529 Savings Plan
All 50 states offer at least one 529 account and you don't have to be a resident of a particular state to enroll in its plan. The individual contribution limits vary from one plan to the next, but some states offer lifetime limits in excess of $300,000. Each year, you can contribute up to the annual exclusion limit without incurring the gift tax. For 2015 and 2016, the limit is set at $14,000 per child or $28,000 if you're married and file a joint return.
You also have the option of front-loading your savings by making five years' worth of contributions up to the annual limit all at once. Just keep in mind that if you go that route, you won't be able to save anything else in your child's 529 account until after the five-year window has passed.
The main benefit of saving in a 529 plan is having your contributions grow tax-deferred. And as long as you use the money in the account for qualified education expenses, withdrawals are always tax-free. Most 529 plans offer a decent mix of mutual funds, so you can pick and choose what you want to invest in.
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2. Custodial IRA
It's never too early to start saving for retirement. If you've got an older child who's working, you can set him or her up with a custodial IRA. With this kind of account, the assets belong to your child but you have control over them until the child turns 18 or 21, depending on your state's rules.
You can set up either a traditional or Roth IRA based on the kind of tax treatment you prefer. A Roth IRA is the best bet if you want your child to be able to make tax-free withdrawals in retirement. However, traditional IRAs come with a tax deduction in the year of contribution. You'll have to decide which tax strategy to pursue.
The contribution and withdrawal rules for regular IRAs also apply to custodial IRAs. The upside is that once your kids are old enough, they can take penalty-free withdrawals from their accounts for qualified education expenses or to put money down on their first home.
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3. CD Ladder
Investing in mutual funds through a 529 plan or IRA means you're subject to fluctuations in the market. If you want to hedge your bets with something a little safer, a CD ladder might be the answer.
With a CD ladder, you purchase multiple certificates of deposit with different maturity dates and interest rates. When a CD matures, you can roll it over into a new one and keep repeating the process for as long as you want to keep saving. You won't earn astronomically high returns with a CD ladder, but it's a long-term savings option that's not a huge gamble.
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