Investing For Your Kid’s Future
9 Minute Read | December 14, 2021
As a parent, you want to do everything you can to set your kids up for success. As a result, you may be asking yourself: How can I invest in my child or grandchilds future?
Knowing the power of compound interest , some folks may want to know how to kick-start their children’s retirement savings. Others just want to help their kids get a college diploma without taking on any debt.
Those are great concerns to have, so give yourself a high five! Whether Junior is still crawling around the living room floor or getting ready to graduate from high school, there are plenty of ways you can invest in the future.
Lets take a closer look!
Are Custodial Accounts A Good Idea
Under certain circumstances, parents and grandparents might consider using a custodial account to pass along money to kids for purposes of paying for college or receiving an inheritance when they reach adulthood.
These plans have certain advantages over others. There are no limits to the amount that someone can contribute to or withdraw from a custodial account. There are also no requirements as to what the child must spend the money on in the future, as there are with 529 college savings plans.
But there are downsides to these plans as well. The tax advantages arent as strong as 529 plans, which come with tax-free withdrawals as long as you spend the money on education expenses. The lack of limits on custodial accounts might also be a disadvantage. You cant stop a child from spending the money on whatever they want once they reach the required age.
How Do You Start Investing For Kids
Investing for your children is simple and beneficial. Once you have a goal in mind, you can open the right account, whether it be a custodial brokerage account, 529 plan, custodial Roth IRA, or as simple as a CD. Many of these accounts allow for tax-free growth, though some may have rules for withdrawal and/or contribution limits.
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Other Options To Save For Your Childs Future
You may not be able to open a TFSA account for your minor child, but you can still save money for their future and this option has multiple benefits.
Start by opening a Child Plan for your child since it allows you to start saving money for your child as young as 14 days old.
Child Plan Participating Whole Life provides your child an annual tax-free dividend every year for life, which they can use towards:
- Any education program around the world
- A down payment on their first home
- Funding their first start-up
- Any financial need in their lifetime
In addition to the benefit of 18 years of tax free growth with no risks, you as their parent even after transferring the plan to them for their future, you can continue to control their access to their funds. With a Child Plan participating whole life plan parents will be required to agree to any withdrawals their child wishes to make and this control can last as long as you wish. If you dont believe your child can manage the hundreds of thousands of dollars in the plan until they are in their 40s, you have no legal obligation to remove the control.
To top it off, Child Plan can be opened by Grandparents and it can be opened by aunts, uncles, godparents and legal guardians. And for grandparents, the ability to open a tax free savings plan for their grandchild which they can transfer tax free is an incredible gift for their future.
How To Open A Brokerage Account For A Child To Invest
Helping your children learn about how to manage their money is a great goal.
One aspect of managing money most people wish they learned about earlier in life is investing.
Due to the power of compounding returns, the earlier you start investing the larger your investment balance could potentially grow.
Your children may want to grow their money to help buy their first car.
Alternatively, they may want to grow college savings to pay for college beyond the low interest rates most savings accounts offer. Investing may be able to help.
If you want to teach your child about investing, one way to do that is by having them start investing themselves. But can a child open a brokerage account? Thats where things get tricky.
Heres what you need to know about opening a brokerage account for a child and how you can set them up.
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Talk To Your Kids About Money And Let Them Participate In The Process
My family always talked about money, like, all the time, Broadway says. Not in a negative way. And always really in optimistic, positive ways and just showing me that money was a part of our everyday lives.
She plans to do the same with her daughter. Having those conversations really early is something thats important, she says. We want finances and investments to be daily conversation pieces in our home.
Another thing she plans to do as her daughter gets older is to let her participate in the investment process. One of the things we plan to do with our daughter is making sure shes involved with these investments, says Broadway. As were picking stocks, let her pick the stocks.
For parents who are searching for ways to initiate a conversation about investing with their children, Broadway recommends looking at companies that their kids already use and love. Thats going to be the best way to pique your childrens interest into potentially investing and owning, she says.
I think that as parents, we should be talking more about ownership with our kids, she adds.
Theres power in being a partial owner of a company instead of just being a consumer, Broadway believes, and she plans to teach her daughter that as soon as possible.
Making A Millionaire: The Power Of Starting Young
Imagine you and your teenager deposit $6,000 into a Roth IRA every year for five years, from the time theyre 14 to the time theyre 19. At an average return of 10% in line with historic S& P 500 returns theyd have $40,293.66 in the account after those five years.
realizing a net anualized gain of +30%
Then say they never invested another cent. The account simply compounds on itself for the next few decades, quietly growing in the background with neither deposits nor withdrawals.
Thats the power of compound interest: Time does the heavy lifting for you.
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How Does A Custodial Account Work
Once you open a custodial account, they work like any other account held with a bank or brokerage firm. Two main roles exist for custodial brokerage accounts:
In the case of a custodial brokerage account, the custodianwho acts as a designated manager or investment advisor providing investment advice and decision-makingdecides how to invest money for the minor who owns the account.
The account manageras well as other entitiescan contribute to the fund an unlimited amount of money, though certain federal gift tax rules come into effect and may impact your tax return if you contribute more than federal limits allow to the minor child.
As discussed above, you can use custodial accounts to invest in a wide variety of assets and investment vehicles, though the institution offering the account will likely curb some types of investment decisions.
These financial institutions offer custodial accounts to protect the best interests of minors who own the assets in the account.
Therefore, they likely wont allow the custodian to use the account to trade on margin nor buy stock futures, derivatives, or other highly speculative and unsuitable investments for the minor.
Once the minor reaches the age of termination, usually the same age as entering adulthood, the custodian relinquishes control of the account.
At this point, the assets transfer to the named beneficiary who can then claim full use of the funds held in the account.
When Saving Money For Children Be Careful To Steer Clear Of Unintended Outcomes
Managing Director, Head of Wealth Planning and Advice, J.P. Morgan Wealth Management
Jeffrey HermanManaging Director, Wealth Planning & Advice, J.P. Morgan Wealth Management/master
When saving money for children, be sure to do so in a way that achieves your goals. When considering ways to save money for minor children or grandchildren, using a custodial account is the first method that might come to mind. Here are a few tips to help you avoid common custodial account mistakes.
What is a custodial account?
A custodial account is generally created by a parent or grandparent for the benefit of a minor child or grandchild. When you put money into a custodial account, you make a gift to the minor beneficiary of the account, even though the minor does not control the account. The account creator usually acts as the accounts custodian.
The custodian of the account controls how money in it is invested and spent. The custodian must manage the account, can invest in most types of assets, and must use the funds in the beneficiarys best interest until the beneficiary reaches the age of majorityage 18, 21 or even 25, depending on the state. Upon the beneficiarys reaching the age of majority, the custodian has a duty to turn the account over to the beneficiary, at which time he or she will become the account owner with complete authority over the account.
Funding an account using the annual exclusion
Taxes and financial aid
Reaching the age of ownership
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Can I Open A Tax Free Savings Account For My Child
Unfortunately Not, Like an RRSP the account is connected to the contributor and the annual contributions are tracked by the Federal Government to make sure you and others dont simply deposit $100,000 and try and earn tax free growth on that much money.
However, while you cant open a TFSA account for your adult child, you can give them the funds to deposit into their TFSA. But be careful you dont deposit directly to the account since the contributions are tracked to the person who made the deposit. Also please remember the TFSA account belongs to your child and not you. Which means that you have no say on how they use the funds.
Any interest or gains are tracked to the owner of the account and are completely tax free.
Can You Open A Brokerage Account For A Child
Financial institutions require a person to be a legal adult to open an account, which usually means they must be age 18.
In some rare cases, they may have to be older.
A child cannot technically open their own brokerage account.
While a child cant technically open their own brokerage account, there are ways to open an account on behalf of a child.
In particular, you can usually set up a custodial account under UTMA or UGMA.
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Can I Open An Investment Account For A Child
Teaching your children the basics of money and investing might seem overwhelming at first. With so much to cover, where do you start?
Fortunately, youve got a lot of available options to simplify investing. But before you get to that decision, youll first need to learn how kids can invest.
Once youve taken care of the administrative tasks like account setup and come to the conclusion you can help your kids learn about money and decided to start investing for your child, you might find yourself asking questions like:
- What should I invest in?
- How much money do I need to start investing for my child?
- How can I buy stocks for my child?
These are all common questions parents and guardians face when deciding how to begin investing for their children. But dont worry, these are questions that can be answered!
How To Open A 529 Plan
Being the leading college saving plan anyone can open and contribute to a 529 account.
The most important and the only challenging part is choosing the right service provider or brokerage. Nowadays, there are so many companies that offer exceptional 529 plans with only slight differences in fees.
However, when it comes to investing for kids, those slight variations in fees can make a big difference in the long run.
So, whenever choosing among the major trading platforms such as Fidelity, Zacks Trade, or Vanguard, make sure you double-check their charges and tax benefits. Compare them and see how they apply to your particular situation and in your state. Beware not to get too distracted with incredibly low fees but oversee high taxes. The same goes vice versa to avoid inadvertent losses.
After you choose the right 529 plan, opening the account is quite straightforward. You can do it quickly online through official websites or in-person . All you need to do is name a beneficiary and fill up some of their personal details like the birth date and Social Security Number .
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Best For Young Children: Usalliance Financials Mylife Savings For Kids
For parents starting their childs account at a very young age, its hard to do better than USAlliances MyLife Savings for Kids account. Its annual birthday bonus for pre-teen savers helps make it our top savings account choice for young children.
$10 in birthday bucks paid every year through age 12
Highly competitive interest rate
Ability to move into a checking account at age 13
Joining the credit union is easy and virtually free
No ATM or debit card access until age 13
A few accounts pay a higher interest rate, or on higher balances
USAlliance understands how much children love birthday gifts, and parlays that into a reward for kids having their own savings account. By paying those under 13 a $10 birthday bonus every year, plus a generous interest rate on top of that, USAlliances MyLife Savings for Kids wins our award for best youth account for young savers.
The earlier you open one of these for your child, the more birthday bucks theyll score. Theyll also earn a highly competitive 2.00% APY on their balances up to $500. Very few youth accounts currently pay above 1%, so the earning potential here is significantly higher than most other options.
Though USAlliance Financial is a , it is open for anyone nationwide to join. The process is easy and requires just a $1 deposit into your first account.
Investing In Your Child: One Last Thing You Should Know
No matter how you plan on investing for your childs future, its important to sit down with your kids when theyre old enough and share your heart behind your gift. Clear communication about the expectations for this money can save you from dealing with family drama around the dinner table during Thanksgiving!
Giving an immature high school or college grad access to thousands of dollars is like handing over the keys of a Ferrari to someone who just passed their drivers test yesterday. Youre setting them up for a nasty crash. If you want your financial gift to be a blessing and not a curse, make sure youre teaching your kids the value of hard work and responsibility. They should have the character, maturity and wisdom to be a good steward of the financial gifts you are entrusting to them.
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Is An Resp A Good Investment
Your savings, even if it is from your own sources, could be added to your registered education savings plan account. Especially if a parent is not otherwise maxing out their contributions, doing so will be more beneficial than saving in an informal trust account. RESP contributions of up to $2,500 per year receive a 20% Canada Education Savings Grant from the government. Contributors can even catch up with an additional $2,500 of missed contributions from previous years to get an additional 20 per cent grant.
Setting Up A Custodial Account Ugma/utma
Minor accounts, created in part by the Uniform Transfers To Minors Act and the Uniform Gift To Minors Act , are excellent options if you are investing for your teenager. You can establish these minor accounts and begin investing within them almost immediately. This money can be used for any purpose including education expenses as well as any other needs the child may have.
The purpose of these accounts is to provide monetary benefits to teenagers and you can establish a custodial UGMA/UTMA account with a brokerage such as Firstrade.
The profit from these investment accounts will be taxed according to the child’s tax rate or potentially the parent’s tax rates if the child makes enough money and is subject to kiddie tax limitations.
Custodial UGMA/UTMA accounts are one of the excellent options for teenagers who want to begin investing. The parents have the final decision over the account until the child reaches 18 or 21 .
At the age of majority, ownership of the account will be transferred fully to the child and the parent will no longer have any control over the account. The child will be free to cash out the account for whatever they please, so it’s important to talk with your child about the intended purpose of the account beforehand.
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