Saving and investing in your child's future to help with education or to give them a terrific start in life is a fantastic idea. Helping to ensure your children's financial future is one of the most valuable money management plans and, correctly done, will prevent tax losses and loss of financial aid.

529 Savings Plan

Setting up an education savings plan for each child is a popular choice when making gifts to children. Present tax law allows deposits up to $65,000 per person to a state-sponsored 529 education savings account. Married couples can double the gift, making the total $130,000. All earnings gained from a 529 account are tax-free if the money pays for tuition and school expenses. As the owner of the account, you have full control over the money. The money in the account can also be used to pay for your own education expenses. Also, financial aid is determined based on the year prior to the aid application--usually the junior year of high school--and students with large sums of money in their name can lose out on financial aid. A 529 account will protect a student's financial aid because the money is in the parent's name.

529 Prepaid Plan

An alternative to a 529 savings plan is a great option for many parents. A prepaid college tuition plan allows parents to buy an in-state, public education. The tuition to a state school is prepaid and the price is locked in at today's prices. This prepaid plan has the same benefits of the 529 college savings plan.

UGMA and UTMA Accounts

These accounts are particularly useful if your child has chosen not to attend college, as the loss of financial aid is not an issue. UTMA and UGMA accounts offer tax breaks for children up to the age of 18. According to the IRS, the first $950 in gains is tax-free; the following $950 is taxed at the child's tax rate. The remaining amount is taxed at the parent's tax rate. In addition, there are no limitations on how the money is used. One drawback is that the parent loses control of the money and has no say in how it is spent when the child comes of legal age.

Source:

CNBC.com: Three Ways to Save for Your Child's Future

Collegeboard.com: 529 Prepaid College Tuition Plans

MotleyFool.com: Investing for Your Kids

More Information:

Loanio.com: Child Savings and Investments