If you have a child, one of the best ways to ensure a bright future is to invest in their early years. The earlier you can put money into your child’s name, the better off that child will be as an adult.
There are many ways to save for your children’s future⏤from IRAs to 529 college savings plans. In this article, you’ll discover seven different investment strategies designed with kids in mind.
1. A Savings Account with Your Child as Beneficiary
This is the most basic way to save for your child’s future. Most banks allow you to name one or more people as beneficiaries, but be sure to check the fine print before you sign any account over to someone else. Suppose you name a beneficiary other than yourself. You might find that there are penalties associated with withdrawing money from the account early. Saving in this way can give your kids some immediate spending money when they reach adulthood. Just don’t expect them to respect the gift if they have access to it at a young age.
2. UGMA and UTMA Accounts: Custodial Accounts for Kids
UGMA and UTMA custodial accounts are a popular way to save for children under the age of 18. These accounts allow you to deposit money into the child’s name. Though there is a limit on how much money you can deposit, these accounts can offer significant tax benefits.
UGMA and UTMA accounts give the parent or legal guardian total control over the account’s management until the child reaches adulthood. This means that you get the final say on whether the money is used towards college, buying a car, or paying bills. Both custodial accounts also protect your money from creditors.
3. Coverdell ESA: Education Savings Accounts for Kids
Coverdell ESAs are another way to save for your children’s education expenses. You can also use this to pay elementary through high school tuition. Coverdell ESAs allow you to deposit $2,000 per child ($4,000 if you have twins) each year into an investment account not tied to the child’s Social Security number.
The money grows tax-free until you withdraw it, at which point it’s considered income for your kids. So keep in mind that withdrawing the money before your children turn 30 will result in a 10 percent penalty on whatever amount you take out.
Unlike UGMA/UTMA custody accounts, the custodian does not have control of the Coverdell ESA accounts. This means that your child will have complete control over how they use the money. This can be good for older kids who are more financially responsible than their younger counterparts. Parents can contribute to Coverdell ESAs until their child turns 18 but are limited to contributing $2,000 each year (or $4,000 if you have twins). The total contribution cap cannot exceed either $95,000 or 100 percent of the child’s earnings from work.
4. Savings Bonds: A Great Way to Save for Kids
Savings bonds generally make poor long-term investments because they pay very low-interest rates compared to other investment options. But they can make good investments for kids because of their low risk and the ability to deposit up to $10,000 per year (in some cases) in a single bond.
The most significant drawback to buying savings bonds is that you cannot redeem them until they mature⏤often several years after your child reaches 18 or 21. Savings bonds are available through the Federal government at face value, which means that if you buy a $100 savings bond, you’ll end up with 100 paper dollars worth of interest when the bond matures.
5. 529 Savings Plans: For College or Future College Expenses
A 529 plan is a type of savings account created by states to help families save for future college costs. Funds deposited into a 529 plan grow tax-free and can be withdrawn without penalty as long as the money is used to cover qualified education expenses. These expenses include tuition and room and board at an accredited US post-secondary institution. If you think your child might want to attend graduate school, you can also use a 529 plan for that.
The biggest drawback of a 529 savings plan is that people who use the money for purposes other than qualified education expenses can incur a 10 percent penalty on earnings. That can easily wipe out any gains from your investment.
Also, your child must attend an accredited post-secondary institution to avoid the 10 percent penalty on earnings. Preparing a college application checklist can make it easy to stay on top of everything you need for your child’s college application and know the overall progress. You will also be able to understand what to prepare early on.
6. Investing in Stocks
Stocks are an excellent investment but inappropriate for very young children⏤unless you’re investing in an index fund that tracks the market as a whole. That’s because it can be tough to tell whether your broker is making good decisions on your child’s behalf. It takes real skill to choose stocks well, especially when you have limited funds with which to work.
When it comes to investing in your child’s future, there are a lot of great options. Just make sure you do your research and choose the investment strategy that is best for you.