Once you become a parent, every little decision becomes about your child. With so many choices and decisions, you want everything to be perfect and nothing less than the best for them.
Among other things to consider, thinking about the best investment plan for a child’s future can be a tough decision.
There are so many options today for investing for kids; the markets are so volatile, and with everything at the tips of your fingers – thanks to the mobile apps – it’s just too overwhelming thinking of where to put your savings today.
However, you know you are on the right track once you think about starting a savings account for your baby.
So, if you are wondering, can I open an investment account for my child? Read on!
What are Custodial Investment Accounts?
Now once you get thinking about investment for a child’s future, several options come your way. Amongst the top choices for you are the custodial accounts.
These are the long-term investment accounts for kids; hence if you are thinking about college funds or future money, this is your best bet.
You just have to put your money here and see how best you can handle it. Single or both parents can contribute to the account, and the investment can go up to $15,000 a year (for one parent) to $30,000 (both parent’s investment combined.)
The custodial accounts are in two forms:
- Uniform Transfer to Minors Act (UTMA)
In UTMA, as the custodian, you can invest in bonds, buy stocks for kids, funds, etc. Here’s more on.
- Uniform Gifts to Minors Act (UGMA)
UGMA can have a wide usage. For example, you can use it as an alternate form of investment, as financial assets and ‘investment vehicles.’ In simple words, you can keep your property deed, art, auto vehicles, etc., in it.
In both the options, you open the investment accounts for minors while they are young. Then, you can deposit the savings there through the years until the child comes of age.
However, money for kids you put into the best investment account for a child cannot be retrieved later by any parent.
Custodial IRAs
IRAs or Individual Retirement Accounts are savings accounts for keeping your assets like bonds, stocks, ETF, etc.
These, too, are a long-term investment for child options, and as a requirement, they consider the owner to have some earnings as income.
So either a parent can set it up for the children as minors, or you can help your kids open it up later, once they start making some money of their own. You can also have your own IRA account in your name and subsequently contribute to it at your discretion.
You can take the RMDs (Required Minimum Distributions) before or after turning 72 years old, whatever seems feasible.
However, if you withdraw money before the age of 59.5 years, you won’t be charged the 10% additional tax on it as long as the investment goes towards higher education expenses.
The money can be used to bear the education expenses of your children, spouse, grandchildren, or yourself.
Potential for Loss
There are many benefits of these savings accounts for kids, but also a few drawbacks.
For one, though these accounts give you a tax advantage, they don’t make for any deductions when filing your taxes.
Even the children have to pay taxes on any realized gains. So the investment is heavily taxed even if your earning is anywhere above $950.
Also, since it gives the children complete access when they come of age, adults cannot control how they use the savings. So as soon as they turn 18 or 21, whatever the legal age is in your state, all your rights would be revoked.
Hence educating the children is most important for these matters. Just imagine handing over a fortune to an 18-year-old, with endless opportunities to use it!
High-Yield Savings Accounts
There are a number of banking products you can get for your kids too. Start with small kids’ savings accounts to teach the young minds about money matters and learn banking starting from a young age.
Young savers’ accounts help them learn the basics and help them earn a little bit of profit on their own.
Just make sure to look through the prevailing interest rate, the minimum balance to hold, and additional fees for the upkeep of the account.
Here are a few of the best savings accounts for kids you can check:
- Spectrum Credit Union’s Youth Account
- Northpointe Bank’s Kids’ Savings Account
- Capital One’s Kids Savings Account
- Alliant Credit Union’s Kids Savings Account
- Pen Air Federal Credit Union’s Level UP Savings Account
- US Alliance Financial’s Savings for Kids
529 Savings Plans
You are looking for how to invest $1000 for a child or where to invest $1000 right now? The 529 savings plan is one best saving plan for the child to secure your child’s future. Just like a Roth account, the investment is tax-free (no federal income tax applied here) as it’s for educational purposes.
In fact, you can have tax-free withdrawals in this best account for kids as well.
This plan limits your tax liability when you withdraw the investment but is an excellent option for future investment for children.
However, there are high limits on the investment amount, and all contributions are made after-tax.
The contributed amount can go as high as $30,000 for joint parent accounts or $15,000 for single parents. So there’s a limit to how much you can ‘gift’ to the children without having to pay a gift tax.
Superfund: You can exercise this option to invest more than $30,000/ to the account. There are five gifts you can give to the child as an individual.
So that’s a good enough amount, and gift tax, too, doesn’t apply as long as you are superfunding five years’ worth of gifts all at once.
However, it is a huge amount we are talking about here. While it won’t be a viable option for many, it can help put money aside for college by investing here while the kids are young.
Now there are two types of 529 plans:
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College Savings Plan
Much like the IRA, the college savings plan is an excellent option as the best investment plan for a child’s future.
You can contribute to this plan and the amount saved here will be invested in mutual funds for kids, target-date funds, and other such investment vehicles.
However, the difference between these and the retirement plan is that, unlike the retirement plans that get more conservative as you take the funds out, these become more stable with time. Moreover, these are state-level plans.
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Prepaid Tuition Plan
Although these do not apply to all the states, these plans help you save a considerable amount on tuition.
The main advantage is when you invest the money today; you lock in the rate until maturity or til your child becomes eligible for the money. So the rates will stay the same all through the years.
Moreover, the tuition program is an excellent way to cover all college expenses and pay back all the institutes contributing to the fund. This also covers the costs of attending a remote institute.
Implications of Financial Aid
Whatever plan you choose, you can set it up on your account or your child’s. However, make sure you secure your own financial future before finding the best investment plan for your child’s future.
Keeping too many eggs in the same basket just to evade taxes and get the most financial aid benefits is not wise.
When the child comes of age, they can access the funds
Until then, they are minors and cannot make any decisions about it.
Also, keep in mind that having custodial accounts makes minors less eligible for any financial aid, student loans, or other grants. Since it is their property, they are considered financially stable and do not need any assistance for affording the college expenses.
Teach Your Child Good Money Management Lessons
It’s never too late to start teaching your kids about money and finances. But how to teach them about it is the tricky part.
Your kids may have many questions, even suggestions, or may just be least interested in the topic.
But you need to keep your patience and come up with the importance of knowing money management and teaching them tricks on saving money for kids.
Tell them how important it is for their future and how it can reap long-term benefits for them.
The best practice to do that is to regularly talk about it with them and make it part of your daily routine and conversations. For example, talk about money matters with your spouse, ask their opinion, and make your kids part of it.
Again, consistency is the key to helping build up their minds.
You’ll be surprised to see how well the young minds are able to grasp the concept and even come up with amazing suggestions of their own.
Don’t hold back; talk about stocks, mutual funds, Roth IRAS, tax breaks, kids portfolio, custodial accounts, how to build a stock portfolio, children’s savings account, the best way to invest $1000, literally everything.
Tell them stories of stock millionaires, and in case anything of interest comes up, you can always google it together.
So you’ll be working in a unified manner towards the greater good of the family. Just imagine how confident your child would feel having adult conversations like these!
Bottom Line
Looking for the best investment plan for a child’s future isn’t as difficult as you may think. True, there are several options, but they are all easy to understand and viable as long as you read through well.
Sitting together and communicating is the key; make sure you have a one-on-one with your child or children to explain everything about the plan to them.
Also, make sure they know the essence of the gift.
Without any prior knowledge about it or how much you had to struggle to decide how to invest for your child, it could lead to it all being taken for granted. So before you entrust them with the investment, make sure all of you are on the same page as a family.
Start when they are young; start with the best savings plan for baby today!
