Saving money for a newborn’s future is one way to ensure that the child has some financial stability when she gets older. There are numerous options for saving money for the baby; however, there are some options that have marked benefits over other options.
High Yield Savings Account
A high yield savings account is a good option for a newborn because the money can be used for any expense necessary, including education, medical expenses, senior trip or a first vehicle. This fact, however, can also be a downfall of opening a high yield savings account for a newborn because the people with access to the account can use the funds for daily expenses, such as diapers, that should be covered in other manners. To prevent this, require two parties to sign for withdrawals of the funds.
Coverdell Education Savings Accounts
A Coverdell Education Savings Account is a savings account that can be used to fund the newborn’s education when the time comes. Unlike some other education savings plans, the funds in this type of savings account can be used for tuition and other expenses at any point during the child’s school years --from elementary school through college. The risk associated with this type of account is that the account is based on investments in mutual funds and stocks. Additionally, there is a contribution limit of $2,000 per child per year. Because of this limit, it is necessary to find an institution that doesn’t charge any fees because the fees come out of the deposit amount, which makes your actual contribution less than the maximum without the ability to deposit additional funds to meet the $2,000.
Section 529 Plan
The Section 529 plan was developed in 1996 as a way for families to save for a child’s college education. These plans are operated by either the state or the school, but can be used at most qualified institutions of higher learning. There are two types of Section 529 plans: the savings plan and the prepaid tuition plan. The savings plan option is based upon a mutual fund investment made by the operating institution. This option doesn’t lock in the tuition rates. The prepaid tuition option enables the family of a child to decide on a college for the child. Once the plan is instituted, the tuition rates for that college are locked and won’t change over time. This plan can be converted to use at another institution; however, a person who exercises this option will lose the tuition lock.