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Updated on Monday, November 9, 2015
From the moment you hold your child for the first time, you want to give them the world. As a parent, you will do anything and everything to set your kids up for success, including saving money for their future.
That love and longing to provide for their future takes place with each subsequent child. But most families don’t have an unlimited pool of resources. So how do you go about providing equally for all of your children?
Despite your best efforts, calculations, and planning there’s no way to predict with absolute accuracy how any financial account will fair over the course of time. When you’re dealing with multiple accounts, varying interest rates, and disproportionate time available for saving, you will have to deal with the problematic situation of gaps and inconsistencies within each of your children’s accounts.
Financial fairness can be an issue in any family. However, when you have multiple children, you have to make the best decisions possible with the resources you have available.
Here are just a few suggestions for trying to level the financial playing field for all of your kids when the numbers don’t come out even.
Unequal Savings Accounts
Let’s say that you have two children, a five-year-old and a two-year-old. Due to financial struggles, you were unable to start saving for your children’s futures right away. Once you regained stability in your finances, however, you decided to start savings accounts for your children to use once they turn 21. You don’t care whether they use the money for their wedding, a down payment on their first home, or help with student loans, but you would like to have at least some money earmarked for their future within a savings account.
Say that you decide to save $50 per month for each child in a simple savings account with a 1% interest rate, with an extra $100 added annually from birthday money. You have 16 years to save before your oldest turns 21, meaning that you will have $12,132 to give to your child once he or she comes of age. Your youngest, however, will have benefited from three extra years of savings and interest, meaning they will have $14,631 once they turn 21. Will that $2,499 disparity cause an issue between your children?
Although you saved the same amount every month for each child, and you did the best you could, it certainly doesn’t seem fair to the eldest. If you, as parents, believe in complete equality for your children, then you can stop funding the younger child’s account once it reaches the same amount as your eldest. You could also get creative with ways to keep it equal. Offer to use the difference to pay their closing costs on a home. You could also use that $2,499 imbalance to pay for their honeymoon or help with a car payment.
Disparity in 529 Account Balances
Besides saving through a simple savings account, investing in a 529 college savings account is one of the best ways that you can set your children up for financial success. A 529 account will give you a way to combat the rising costs of college and help keep both you and your children away from needing to accrue student loan debt. No matter what your children decide to do with their educational future, a 529 account will pave a way for them to attend college, training schools, or apprenticeship programs.
As your child’s 529 account holder, you will retain control of the assets within the account no matter their age. Unless your child is also named as a purchaser on the account, he or she will not have any control over the funds. This feature goes a long way in achieving financial fairness.
So what happens if you save in two separate 529 accounts? They will stay separate until and unless you decide to make any changes in the balances. One of the most common questions regarding 529 accounts is whether or not you can transfer balances to other beneficiaries. Don’t worry, you can choose to transfer the funds to a different beneficiary at any time, as long as the new beneficiary is a close family member (out to first cousins). Your children’s accounts will ultimately hold different balances, so having the ability to transfer the money to a different beneficiary will help if you don’t have enough money saved for one child and you have too much saved for the other.
If one child decides that they don’t want to go to college, you can withdraw your money from a 529 at any time. If the distributions from the account are not earmarked for qualified education expenses, however, you will be taxed on the withdrawal as well as financially penalized. You can use the money, but it won’t be the same amount as if it were used for education or training expenses.
Setting up a 529 account for each child is one of the most impartial and financially fair decisions you can make as their parent. Regardless of how you or they decide how to use it, the beginning intention stays the same. By transferring money into a different account or using the money for a different purpose, you’ll be able to make the best and most fair decision for each child.
Do the Best You Can
If you are set on achieving financial fairness for your kids, simply approach each unique situation with openness and honesty. Make your children aware of any account differences. Get their feedback on where or how they could use your help financially. Just do the best you can.