If you have a child – or perhaps have one on the way – you might be curious about the best investments for kids.
When in doubt, it’s always a good idea to meet with a certified financial planner. They’ll be able to go over all the details, risks, and benefits of specific investment accounts, types, and services.
However, there are a few plans that you may want to turn to (including those offered by specialist apps or websites) when you’re on the hunt for the perfect place to invest for your kids. We will dive into what investments for kids may look like and what some top options are for making the right investments. Ready? Let’s get started!
Best Investments for Kids
Whether you want to make sure your child is able to go to college, has enough money to buy a house, or is even just taken care of in the event that something happens to you, investing for your child’s future is important. These top investment options for kids will help you invest money wisely.
1. Custodial Accounts
Under the Uniform Gift to Minors Act and the Uniform Transfers to Minors Act, or custodial accounts, you can put investments in a separate, specialized account for your child or grandchild.
You’ll act as the trustee until your child is of age – usually 18 or 21. Once they reach the right age, they will become the owner and can do what they wish with the funds. As a parent or grandparent, you can give up to $15,000 per year per individual ($30,000 for a married couple) without triggering the gift tax.
The only downside to a custodial account is that it does affect a child’s standing in regard to assets for financial aid eligibility.
2. 529 Plans
If reducing your child’s future student loan debt is the goal, then a 529 plan is the way to go. This plan will let you put away money that can be used on most qualified education expenses. In most cases, you don’t have to pay taxes on withdrawals.
This kind of savings plan offers a variety of tax advantages and can be opened as soon as your child is born. Your savings in this kind of plan can be used on college expenses as well as K-12 public, private, and parochial schools. The money can be withdrawn at any time with no penalties as long as the funds are being used for qualified education expenses.
You can also consider a UTMA, or a Uniform Transfers to Minors Act college savings account, like that offered by UNest. With a 529 plan, you can only use funds on qualified college expenses. But, with a UTMA you can use these funds on other aspects of your child’s future as well.
3. Traditional and Roth IRAs
Both the traditional and Roth IRAs, or Individual Retirement Accounts, are tax-advantaged savings accounts in which you can keep investments like stocks and ETFs. The account owner must have earned income so it’s not usually a great idea to start this kind of arrangement with a child.
However, you can teach your child about money management (and help safeguard their future) by opening a custodial IRA. When your child becomes a teen, they can contribute with the funds from their first job.
If you want to contribute from your IRA, you can contribute by withdrawing from your own traditional or Roth IRA before age 59 1/2 without paying a 10% tax. This can only be done if the funds will be used to pay for qualified higher education expenses in that calendar year.
A final option to investing for your kids with an IRA is to set up a Roth IRA in your child’s name. Your child must have earned income from a job and parents can contribute up to the maximum annual contribution – which is what your child earns in one year.
4. Coverdell Education Savings Account
Another way to reduce your child’s student loan debt, as an alternative to the 529 plan, is to open up a Coverdell Education Savings Account. This is similar to a 529 plan that will let you put money toward qualified education expenses. As with a 529, you can use the funds on something else besides seduction, but you will incur a 10% penalty.
You can’t deduct contributions and you have to make them before your child is 18. You can set up multiple ESA accounts but you can only contribute up to $2,000 per year in total.
5. Stocks and Brokerage Accounts
There are a few ways you can invest money for your child’s future with stocks.
Stocks are perfect ways to invest for kids. They offer a long-term orientation and will provide many years of fruitful returns, when done correctly.
Most of the options in this post will allow you to hold stocks in some form, whether those are through mutual funds, exchange-traded funds, or individual stocks.
The difference is that you won’t be playing an active role in selecting those stocks. You can select individual stocks you’d like to invest in with the apps and financial services we’ve described below – or you can participate in a brokerage account.
A brokerage account is often seen as an alternative to a Roth IRA or Custodial IRA. It is a taxable account that will enable you to invest in various securities such as bonds, stocks, and mutual fund accounts
These accounts have a medley of tax advantages but there are a few restrictions to pay attention to as well. As with a custodial account or custodial IRA, you can open the account before your child turns 18 and transfer it to them beneath the Uniform Transfer to Minors Act or Uniform Gift to Minors Act later on.
When selecting a brokerage account, be sure to consider the tools that these firms offer to younger investors, if you’re so inclined to get your child involved. Work with your child to select stocks they know and be sure to diversify the portfolio with index funds so your child can have shares in hundreds of companies instead of just a handful.
Brokerage Account Apps and Services
You don’t have to go it alone when it comes to finding the right broker. You have plenty of digital options to help you get the job done.
One is to use a service like Robinhood. Robinhood lets you give your kids the gift of a portfolio by using a simple app. It makes investing fun so you can invest in your child’s future with just a few taps.
E*TRADE is another great option but you do need to be a bit more experienced when it comes to the stock market. This company offers commission-free stock and ETF trading as well as futures and options. It has some advanced researching capabilities, making it a good choice for people who want to invest in the stock market (and more or less know what they’re doing).
TD Ameritrade is a good middle ground. It’s a bit more advanced than Robinhood but not quite as complex as E*TRADE. An online broker, TD Ameritrade will allow you to trade ETFs or stocks in an easy-to-navigate platform. It’s easy to change hands over to your child when they are of age, too. They’ll have all the tools they need.
ETFs, or exchange-traded funds, are investment options that let you combine stocks, bonds, and other investments. They are similar to mutual funds in that regard.
However, they trade openly on the stock market exchange and therefore, have more liquidity. They are traded throughout the day. You can use ETFs as both active and passive investment options.
7. Mutual Funds
You can set up mutual funds as a method of investing for your kids, but if you already have kids and want to get them started in investing, then you can get them involved in setting up mutual fund accounts when they are still young.
When you buy mutual funds, you’ll be purchasing a bundle of securities to build a portfolio. In essence, you will be pooling your money with other investors, creating a bigger collection of bonds, stocks, and investments.
There are both passively managed and actively managed mutual funds. You can invest in them directly or through 529 plans, IRAs, or ESAs.
8. Savings Accounts
This is perhaps the most basic way to set aside money for your child and it also tends to be the lowest interest (but also the lowest risk and the easiest to manage).
Setting up a savings account for your child will let you set aside money that your child can use however they’d like. If you set up a savings account in your child’s name (with you as an additional account holder), you can contribute money while also providing your child with an opportunity to learn how to bank and save.
When selecting a youth savings account, look for one that offers a decent interest rate with no minimum balance requirements.
9. Savings Bonds
Savings bonds aren’t as common as they used to be, especially compared to other types of investment accounts, but they still offer a rock-solid way to set money aside.
Savings bonds are zero-risk methods of investing that can be cashed out at any financial institution. Although you will no longer receive physical certificates as you may have in the ’90s – instead, you will buy only at TreasuryDirect.gov – savings bonds are great long-term solutions.
Just note that the interest rates on savings bonds aren’t quite as high as they used to be. However, if you can hold on to them for at least a couple of decades, you can double your investment.
General Tips for Investing for Kids
Here are a few more tips to keep in mind when you’re investing for kids, regardless of whether you’re using something as simple as a basic savings account or as complicated as a custodial brokerage account.
Don’t Neglect the Grandkids
Most of the investing options above can be tapped into by parents and grandparents alike. Don’t assume that you’re limited in your options as a grandparent, since you can easily provide for your grandkid without having to tap into your retirement savings.
Try Acorns Early
We mentioned above that using a brokerage account is a smart way to invest early in your child’s future.
Acorns Early is a service from the investment company and app, Acorns, that offers a brokerage account for parents (or grandparents) who are interested in investing for their families. Acorns Early offers a variety of investment portfolios at various risk levels. It can be a great way to invest money for kids as well as to teach your kids about investing.
You don’t have to have a minimum deposit and you can contribute money on a regular basis – for as little as $1 a month!
Cash Can Work
They say cash is king – and for good reason. With the annual exclusion, you can give up to $15,000 in cash gifts tax-free each year (married people can double that amount).
These gifts aren’t necessarily a method of investing for kids, but can be incorporated into your overall financial plan. If you’d rather not sift through the various methods of investing for kids and would rather just plan to give cash, then this is an easy way to help your kids out when the time comes.
“Stash” That Cash
Stash is a custodial account that you should consider if you want to open a taxable account for your child or grandchild. For as little as $1 per month, it will help you manage your finances and simplify (as well as demystify) the process of selecting investments. This app is a great choice if you are a beginner.
All of the options for investing for kids that we’ve told you about in this article are great – but you don’t have to settle for using just one. Diversify your portfolio and your investment strategy. That way, you’ll have a surefire plan no matter what happens.
Begin Building Credit
A good credit score goes hand-in-hand with financial responsibility. Give your child a headstart on building his credit score by making your child an authorized user on your credit card or giving your kid a secured credit card.
You won’t necessarily be investing a set amount of money for your child, but investing in their financial future by providing them with the right financial tools can be even more valuable than cold, hard cash.
Get Life Insurance and an HSA
Buying life insurance is another affordable way to protect your kids now and in the future. You should have policies in place for yourself as well as for your child. Whole life insurance tends to be the best route for children, so that there is protection as long as you pay the premiums.
A health savings account or HSA is a wise choice, too. It is similar to a 529 college savings plan. that you will contribute tax-advantaged dollars that you can use for qualified expenses.
The only difference is that you’ll be using the funds for medical costs instead of college. You can use it on any expenses your health insurance doesn’t cover, like dental, vision, and prescription drug care.
Try Trust Funds
A lot of people assume that trust funds are just for the elite, but that’s not the case. You can use them to pass on investments, assets, and money to your child even if you aren’t rolling in the dough.
Trust funds don’t have to be claimed as assets so your child can still benefit from financial aid when they go to college.
Talk To Your Kids About Investing
Talking to your children about investing can be complicated and challenging, but it’s an important step to take. Start the conversation early and invest consistently. Skip the jargon and plain language and make sure your child is as involved as possible in your investment decisions.
Why You Need to Start Investing Now
It doesn’t matter how young or old your child might be – investing is a great way to make sure they have money set aside for their future.
Even as little as $1 a month can make a difference.
By using the different savings and investing options listed above (and some of the helpful apps we’ve mentioned!) you can make sure your child is provided for no matter what the future throws your way.