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New Parents: How to Set Up Your Child for Financial Success

Parents pass on many traits and skills to their children. An important skill to pass on is financial literacy. There are many ways for parents to prepare themselves and their children for financial success. Here are some moves for new parents regarding understanding and implementing intelligent financial planning.

Financial Success - Planning for the Unexpected

  • Health Savings Accounts (HSA)

Preparing for the unexpected is always necessary but sometimes needs to be remembered. Health Savings Accounts (HSA) make it easier to handle the unexpected when it comes.

The IRS explains a Health Savings Account (HSA) as "a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur."

An HSA may be used for any qualified medical expenses, which covers many categories, including costs like "doctor's fees, infant formula, breast pumps, and even baby sunscreen."

Parents can build an HSA as some employers sponsor a health plan. Contributions to the account can be allocated from each paycheck. Additionally, "contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income."

For further tax optimization, "you claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don't itemize your deductions on Schedule A (Form 1040)."

Financial Planning for your Child's Education

  • A 529 Savings Plan

A 529 Savings Plan is tax-free and saves money for qualified educational purchases.

Saving for College explains that qualified educational purchases include: "costs required for enrollment and attendance at in-state, out-of-state, public and private colleges, universities or other eligible post-secondary educational institutions. Qualified 529 plan expenses also include up to $10,000 per year in K-12 tuition expenses".

Grandparents may also use a 529 Savings Plan to save for education expenses for their grandchildren. However, Saving for College suggests first withdrawing from the parent's savings plan as "Funds withdrawn from a grandparent-owned 529 plan count as student income on the Free Application for Federal Student Aid (FAFSA) and may hurt the student's eligibility for need-based financial aid."

Some parents may hesitate to open a 529 Savings Plan regarding whether or not their child will choose to attend a university. However, there will soon be ways to optimize a 529 savings plan if a child does not attend college penalty-free.

"Beginning in 2024, excess funds in 529 plans can be converted to Roth IRA savings for your child," Forbes announces. Forbes goes on to explain that while the child may not choose to go to college, the savings plan can be applied "(in their retirement years) and may even be used toward a first-time home purchase (since Roth IRAs allow for this under specific circumstances)."

Financial Planning for Retirement

  • Roth IRA

It is never too early to plan for retirement. Your children's financial success can also mean introducing ways to prepare for retirement. A Roth IRA is an investment account with tax-free income during retirement.

Retirees may indulge in tax-free income based on the fact that with a Roth IRA account, "you contribute after-tax dollars to a Roth IRA—in return, withdrawals in retirement are not taxed."

Forbes explains how it works: "once you turn 59½ and your Roth IRA account has been open for at least five years, you may withdraw earnings free of income taxes or penalties, for any reason."

Strategize with the Best Wealth Advisors

Parents can plan for their children's financial success through to their retirement. We use holistic and unique planning techniques at Park City Wealth Advisors to fit your family's needs, goals, and risk tolerance. Our team aims to redefine the vision of your family's financial legacy by using carefully calculated, tax-optimized strategies.

We also believe these techniques are a great way to include the children early on in the conversation to start creating a fiscally responsible mindset and habits! Contact us today to get started!

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