Oh Baby! Where do I begin?

As new parents there are so many challenges, and saving for your babies’ future might not seem to be the most urgent thing to do. Time is so incredibly important when it comes to investing though so the sooner you get started the better.

Where to begin though?

There are issues with funding education, healthcare, and retirement but there are also tax incentives for people to invest to self-fund those expenses down the road. This led to the creation of things like Roth IRAs, HSAs and 529s which can offer huge tax benefits when the funds are used what they are earmarked for. The longer that money has to potentially compound after tax the bigger the potential long term tax savings. Don’t get deterred if you feel like the amount you can save is small, the magic of compounding happens mostly from time and persistence. Starting small now could make a huge difference to how much will be there in the future.

UTMA/UGMA accounts and 529 Educational Savings accounts of the most popular types of accounts people open for their minor children.

A 529 Educational Savings Account is arguably the bucket you want to start funding first when it comes to setting up your child long term. There are always exceptions, and your circumstances must be considered.

New parents might be a little hesitant to open a 529 Savings Account.

I mean, it’s for college right? What if my kid doesn’t end up going to college or gets a scholarship?

Not so fast, 529 accounts have evolved and expanded which is why they can be a great place to start even if college is an unknown.

You want to swaddle your baby, not handcuff them, 529 Accounts are much less restrictive than they used to be.

Since 2017 numerous tax laws have passed that added new benefits to 529 accounts.[i] The TCJA[ii] expanded the plans to cover K-12 expenses too, not just post-secondary education. On top of that starting this year there are opportunities to “roll over” unused funds from 529 Accounts into Roth IRAs!

I always recommend consulting a tax professional but “The big advantage of 529 plans is that qualified withdrawals are always federal-income-tax-free—and usually state-income-tax-free too.”[iii]The thing is though that there has been a broadening of what is considered a qualified education expense and now, as of 2024[iv] there is the ability to “roll over” unused funds for 529s.

This is wild!

This makes opening a 529 for a baby almost a no brainer. You can start investing in a tax advantaged way for their education, but if they don’t end up needing it for education beneficial ownership can be transferred between relatives or even rolled into a Roth IRA.

Many states offer 529 plans with small minimums and low-cost fund options. You may be able to get started with as little as $25 and can set up automatic contributions in regular intervals of small amounts. It could be great to set it and forget it for the next years.

Having a diversity of different options of where to pull funds from in the future can be hugely beneficial. Tax laws change, by having tax diversification you will have greater flexibility which is important because you never know how the IRS will want you to bend.