Don’t wait until your kids are all grown to start saving for them. No, you should start as early as possible. Psychology has it that little ones tend to grasp important lessons during their informative stages. So, you should also instill critical skills like money matters early in their lives. This is very beneficial in a number of ways.
First of all, children who learn the art of investing early gain crucial financial literacy unlike their counterparts. They are more likely to be financially stable in their lives. Other than teaching them, the investments you make gives them strong foundation to build on. As you invest, that is the right time to introduce your kids to the world of finances.
If you’ve been wondering where to start your journey, we’re here for you. We’ve compiled a list of popular investment plans you can set up for your kids.
Top 5 best investment accounts for kids
1. 529 savings plan
For a parent, education is the best form of investment you can gift your child. 529 savings plan helps parents to save for their children’s education. The amount saved is tax free and remains so as long as it is used for the qualified expenses.
However, when used for none qualified purposes, a 10% penalty and tax are imposed on the earnings. Some of the qualified expenses include;
- Tuition fee
- Books and supplies
- Boarding expenses
The 529 plan is actually for the parents. It is more of an IRA and 401(k) plans. You make the savings after taxation. Overtime, you can reallocate the packages if you want. Some of the benefits you gain with this plan include;
- No taxation to most of the withdrawals
- You can withdraw your money anytime
- The plan applies to private, K-12 public and religious schools
- You can customize your portfolio with stock and bonds
2. UTMA/UGMA Account
If you have a long-term savings goal for your kid, think of UTMA/UGMA. The abbreviations stand for Urban Transfers to Minor Act and Uniform Gifts to Minors Act respectively. This account operates like custodial IRA. It is opened by the parent under the child’s name. Then when the child is of age, the parent can transfer it to their custody.
The investments here can be money, life insurance, stocks or annuities. The proceeds are not strictly regulated. The beneficiary can use the benefits in different ways not necessarily education. But the money is taxable. The tax rates vary depending with the blocks. The first $950 is tax free whereas the next $950 bunch is taxed at a child’s income tax rates. The balance attracts the parent’s income tax rate.
Instead of 529 college saving plan, some people opt to use UTMA/UGMA to save for their kids’ education. Although, its return on investment is not as favourable as the former. Parents here invest after taxation. A single parent can save up to $15,000 whereas a couple can jointly save $30,000.
3. Brokerage Account
Brokerage accounts are the best when it comes to flexibility and high returns. As the parent or guardian, you remain in control of the account until the child comes of age. Then, you can transfer the account to under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act. For consistency purposes, you can link the account with your paycheck for automatic deductions after tax.
The good thing is you have an option to customize your portfolio. Brokerage accounts give you the freedom to choose the aggressive and conservative investments. Always consider your risk factors and time frame. Also, a good broker shouldn’t charge you for every trade. You should as well avoid those that set account minimums for you. Good examples of such brokers are;
- TD Ameritrade
- E*TRADE
- Robinhood
4. Custodial IRA
No kid below the federal set adult age can open an IRA account. The good news is, parents can circumvent this by opening a custodial IRA for their children. The plan allows you to invest for your child in an account with stocks, bonds, among other securities. It comes in two forms; traditional and Roth IRA. The two are almost similar with only difference in taxation time.
Roth IRA offers non-taxable withdrawals for your kids when they retire. In case they decide to withdraw the money before the retirement age which is 59 years, they will pay a 10% penalty.
On the other hand, traditional IRA attracts tax deduction. So, your child’s income will reduce. Roth IRA is the best as it guarantees maximum benefits.
Once the child attains the legal adult age, you can then transfer the account to them. The hard task will be explaining to them to allow the money grow in the account and benefit the compounding interest.
5. CD Ladder
This is an investment strategy in which you can divide your money into equal bunches and put it in CDs with varying maturation dates. CD stands for Certificate of deposit. The major benefit of this method is to reduce the risk of reinvestment.
Yes, accounts like brokerage and 529 are good, but sometimes the unexpected can happen. For instance, in case of a market volatility, you may end up losing money. CD ladder seeks to cushion investors against such aggressions. When the interests are high, there will be more money to invest in CDs. If the market plummets, your long-term CDs will reap more. You can keep reinvesting your CDs after maturing for as long as you want.
Even though every form of investment has a certain degree of risk, CD ladders are among the safest. They give you peace of mind as you are not worried about the market trends and instabilities. Ultimately, your child’s future is secure.
Take away
Investing for your child gives them a head start in life. Its also a practical way of inducting them in the financial literacy school. So, you shouldn’t hesitate to pick one of the top investments plans we’ve discussed above. They aren’t the only accounts available but they are among the best in terms of returns, safety and convenience.
Disclaimer
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