How to Make Your Child a Millionaire

Like all parents, you want your child to prosper. Many of us are committed to providing our kids with advantages we did not have and ensuring they never have to worry about money.

Establishing savings funds for your child is an excellent way to do it. If you invest wisely, those accounts have the potential to build a legacy that will ensure their financial security.

Can you make your child a millionaire? Absolutely! Today, we’ll share some ideas and tips on how to save and invest in your children’s future.

529 College Savings and Prepaid Tuition Plans

Higher education doesn’t come cheaply. With tuition on the rise, the earlier you can start planning, the better.

While there’s no guarantee your child will attend college or what professional direction they want to take, putting money into a 529 plan gives you the benefit of tax-deferred savings that can be spent on a variety of qualified education and training programs.

There are two types of 529 plans. One is an education savings plan, and the other is prepaid tuition. Savings plans provide tax-deferred growth advantages, and withdrawals are tax-free if used for approved expenses. The parent or donor controls and administrates the plan. Underlying investments that fuel account growth are typically mutual funds, but this feature varies from state to state. In some cases, the investments will become more conservative as the child approaches college age, while others remain the same for the duration. Many offer an FDIC-insured, guaranteed option to protect the principal.

Prepaid tuition plans allow you to secure today’s tuition rates for selected schools, which gives you the benefit of significantly lower tuition at enrolment. These plans are administered by the state or colleges themselves and pay out when the child reaches college age.

Though Section 529 is part of the federal tax code, it is controlled by the state. They are exempt from federal tax and are typically not subject to state tax as long as funds are used for qualified expenses. Contributions, however, are not tax-deductible.

Savings plans are offered in all states, while prepaid plans are only available in a few. Check the College Plan Savings Network website to see what’s available in your state.

Taxable Brokerage

Taxable brokerage accounts are the most flexible way to save for your child’s future as you control the fund, it remains in your name, and any income from the account is taxed annually, unlike a tax-deferred qualified retirement fund. Since it isn’t in your child’s name, you can change your mind if you so choose.

So, essentially, you’re putting money away for your child’s future, and it’s a simple way to do it with few rules to abide by regarding how it’s spent or when you hand it over.

In terms of wealth generation, let’s say you’re putting $2400 into the account each year. By the time your kid turns 18, you’ve got $43,200. With 7% compounded annually, that investment would be just over $89,700. If savings continued until age 65, that would be almost $3 million!

Custodial Roth IRA

Like a Roth IRA, a Custodial Roth allows you to contribute after-tax dollars that you can withdraw, tax-free, in retirement. Like other Roth IRAs, they have annual limits and rely on taxable income. If the child has earned income at any point, they can also contribute to the account.

Even younger children can earn money in various ways, such as acting, modeling, running their own income-generating business, or creating social media or YouTube content. You might also consider hiring your child to work at your company. As long as the work is bona fide, the child has actual duties, is capable of performing them adequately, and is paid fairly for the work they do, it’s totally legal.

Any income generated is taxable and can, therefore, be at least partially invested in a Custodial Roth. The current contribution limit is $6,500 per year. Assuming 7% interest, the investment will have grown to $221,000. At age 65, assuming the same yearly investment, the fund would be well over $5 million.

Uniform Transfers to Minors Act (UTMA)

UTMA is part of the Uniform Gifts to Minors Act (UGMA), a law that allows minor children to receive financial gifts without going through an adult guardian or trustee. The child whose name is on the fund avoids tax consequences until they turn 18 or 21 – whichever is the legal age in the state where the fund was established. Unlike UGMA, UTMA permits a more varied range of investments, including fine art, patents, intellectual property, real estate, and more.

UTMA excludes contributions from taxation up to annual limits, currently $18,000 per year but going up to $19,000 starting in 2025.

One significant caveat, however, is that because the fund is in the minor’s name, it is viewed as an asset and may impact eligibility for scholarships or financial aid. Earnings are taxed at the kiddie tax rate up to the IRS threshold of $2600 per year (which applies to unearned income), after which they are taxed at the adult rate.

Different states have their own rules for UTMA, so it’s a good idea to check with your financial advisor so you know how contributions will impact your child’s investment account.

What’s Next?

While it might be hard to imagine, investing as little as $1000 per month can pay for their college education and build a sizeable nest egg over time. By committing to one or more investment accounts mentioned here and staying consistent, your child will easily be a millionaire before age 40.

Currently, you may gift up to $19,000 yearly to your child without filing a return, and they can earn up to $13,500 before they have to pay income taxes.

If you have any questions about starting an investment fund for your children, speak to the experts at Tax Smart today. We’d love to help you shape a future for them you’ll be proud of.