Lastly, if you’re going the route of the kids own savings, look into an UGMA or UTMA account. Which one is dependent on your state. Most states are UTMA these days. I’m not even sure what the difference between UGMA and UTMA, but you won’t have a choice. (Uniform Gift/Transfer to Minors Act)
You set up the account through your favorite custodian (Vanguard, Fidelity, etc.) and you can gift the kid up to the annual gift limit each year and invest it however you see fit. The income on the account is taxable to the kid.
The kid doesn’t have to work or “work”… you can start this when the kid is a baby. It’s just a gift.
The caveat here is that at some point along the way the kid may have to start paying tax on the income. A dependent child’s standard deduction is $1,100 if they don’t work. If they do work and earn more than $750 then their standard deduction is their work earnings plus $350 (unless that’s more than the regular standard deduction).
Investment income up to $2,200 is taxable at the kid’s tax bracket which for most kids is 0%. Above $2,200 they are subject to the “kiddie tax” which means that their investment income above $2,200 is taxable at their parent’s marginal tax rate for investment income. That’s $2,200 of interest + dividends + realized capital gains earned in a year, mind you… not account balance.
So as the UGMA/UTMA account grows and the investment income along with it and the kid is a teenager with a part time job too… you might have to pay some tax on the earnings. But probably less than you as a parent would.
There are no restrictions on how UGMA/UTMA money is spent so it’s nice for stuff that doesn’t count for 529 expenses. K-12 private school tuition above $10,000 per family, going on a trip between junior & senior year of high school to look at colleges, application fees, transportation & parking expenses, room & board above & beyond what the school would charge, and probably more I’m not thinking of.
It’s a nice supplement to the 529. Like the 529, any contributions are considered gifts so keep the gift tax exclusion in mind.
It’s the kid’s money though so once they reach a certain age (usually 25, I think, but it can vary by state) they can withdraw it and spend it on hookers & blow if they want… if there’s anything left by then.