Setting Your Children Up for Financial Success

Parenting can be a challenge. You know this if you have lived through the “terrible twos.” If you haven’t yet had that experience, the “terrible twos” is a colloquial term for a phase of childhood typically starting around 18 months and lasting until around age 3 or 4. Your daily mantra for this stage is, “This is a normal developmental phase experienced by young children (and is my child ever normal!).” It is no accident that children in this stage are also terribly cute.

Once the physical and emotional challenges of parenting very young children begin to wane, you can become more focused on how to best prepare your child to become a happy and productive adult. Warning: you will pour your heart and soul into helping your child become an independent adult, and you will cry when they become just that. But we digress.

Part of teaching your child adulting skills is helping set them up for future financial success. We will discuss three of the most common strategies below.

Education

• Education Savings Plans, also known as 529 Plans, allow parents, grandparents and even family friends to contribute to your child’s future educational needs. The contributions enjoy tax-deferred growth, and withdrawals for qualified expenses are tax-free.  The maximum account balance limit is $590,000 for 2025.
• Most states provide tax deductions or tax credits for 529 Plan donors. For single filers, Arizona allows a tax deduction for donations of up to $2,000 per beneficiary per year, while joint filers can deduct up to $4,000 per beneficiary on their Arizona individual income tax returns.
• Arizona has expanded the allowable use of funds from a 529 Plan to include not only college, but primary and secondary school tuition.

Investing

• Investing in the stock market for your child allows for long-term growth of funds.  This path does not create a tax advantage for parents but opening a custodial brokerage account, commonly known as UTMA accounts (Uniform Transfers to Minors Act), for your child can start them on the path to property ownership and wealth management early in life.
• As the adult who establishes the custodial account, you will manage the assets in the account while your child is a minor.  The child would assume full control of the account once they reach the state-defined age of majority (in Arizona, this is age 18).
• Contributions to the custodial account become an irrevocable gift to the child and cannot be revoked by the custodian.
• If your child is of working age and receives a W-2, you can help them establish a ROTH IRA.  Contributions to Roth IRAs are made with after-tax dollars, but the money grows tax-free, and withdrawals in retirement are also tax-free.
• ROTH IRA contributions for minors are limited to the lesser of the child’s earned income or the annual contribution limit, which is $7,000 in 2025.
• You can give cash to various investment vehicles as gifts to your child. The annual gift exemption for 2025 is $19,000 for individuals, which means that a married couple could contribute $38,000 per child to their various investments in 2025 without having to file a gift tax return.

Insurance

• As a parent you probably have a life insurance policy for yourself, but you may not have considered insuring your child. There are various benefits to getting life insurance policies for children. Insuring a child can lock in their ability to be insured through their life regardless of future illness. Premiums tend to be lower for younger, healthier individuals, and purchasing a policy for your child while they are younger allows you to lock in a lower premium for the duration of the contract.
• Consult with an insurance broker to make sure that you select the correct type of policy, but many whole life policies build cash value over time that is tax-deferred.  This cash value can be borrowed against for college tuition, a home purchase, starting a business or any other future investment possibilities that may arise.

We recommend that you discuss the details of any investment plan for your child with your financial planner or CPA.  At R&A, we work closely with many wonderful professionals and would be happy to provide you with recommendations if you do not currently have a financial planner. We can also answer your questions about the tax consequences of various investment decisions. We would love to assist you in raising competent, independent children!