I heard this question recently: "What is the best way to save money for my child? Should I use a 529 College Savings Account, a Roth IRA, or an individual brokerage account?"
In my experience, this is a question many parents commonly ask. While each type of account comes with its own set of pros and cons, not all approaches to answering this question are created equal.
How to Answer this Question Using The Conventional Approach:
One way to answer this is to first clarify what you are trying to accomplish. For example…
Is this for education now or someday?
How significant are tax benefits now and for your child down the road?
How you answer these questions will be very informative as you make your ultimate decision.
One way to decide how to save for your child is to begin with questions such as these. If you work with an investment manager, these questions are likely where they will start.
However, in my experience, this is the wrong place to start. It's like deciding to build a building. The first decision you make is whether to use 2x4 studs or steel beam before you even know what you want to use the building for!
How to Answer this Question Using Our Values-Driven Approach:
I’ve found that the best way to answer this question is to start with what matters most to you!
This may sound a bit "squishy," but bear with me… The most helpful answer to a question like this really begins with a conversation about what you value. Every parent and every family values different things and this will change how they make financial decisions. Let me explain…
Valuing Flexibility:
Let's say we determine you value maneuverability or non-conformity. This could mean you want to keep your options open with any money you set aside for your child and don't want to pigeonhole them into going to college someday. In this case, an individual brokerage account could be a great fit.
Valuing Safety:
Or say higher learning, the predictable path, or legacy are a high value to you. What this could mean is that you feel strongly that your child should attend college. Using a 529 College Savings Plan may be just right for you.
Valuing Impact:
Finally, what if building wealth is one of your primary values? In this case, a Roth IRA could make the most sense, as it is a great way for you to begin building generational wealth for your child.
There are other steps in our process of answering this question and ultimately helping you decide on what is right for you. As a financial planner, I help clients navigate these types of questions and enjoy increasing their return on life, not just their return on investments. So, instead of starting with your plan and portfolio, start with your values!
Or how we put it: Purpose, then Plan, then Portfolio.