Hopefully, you’ve been saving right along for your kids’ futures. Whether a small nest egg or a growing fortune, you want to be able to provide for your children as they grow up and enter the real world. But how do you go about it in a way that will get you the most for your money and efforts? Here are some tips when investing for your offspring.
First off, you have to come up with some goals for this account or accounts. The primary goal should be to end up with as much money as possible for when your child needs it. However, there are other secondary goals along the way to consider. You also want to teach your children about investments so that they can respect the money they are accumulating and use it for its intended purpose: wise purchases throughout adulthood or even their own retirement. Whether you’re saving for their college or their first house, make these goals clear with your child from the get-go. Getting them in on the saving process makes it less likely they will squander what they are given later on. Now is the time to instill a respect of money and of its power.
Next up is deciding who will have control of the account and until when. You have two choices: custodial or guardian accounts. With a guardian account, you own the account and everything in it. You can take out money at any time but you also have to pay taxes on it. A custodial account, by contrast, is owned by your child. You can control it until they hit adulthood, but over the long term, it’s up to them when and how much to withdraw.
Choose an IRA
An IRA stands for Individual Retirement Account, and there are three types: Traditional, Roth and Education. Traditional IRAs are tax-deductible and you won’t have to pay a penalty later if you use the funds on qualified higher education expenses. Roth IRAs are not tax-deductible but you aren’t taxed at withdrawal time and you don’t face a penalty, provided you’re over 59 ½. An Education IRA allows you to invest a maximum of $500 that is not tax-deductible but you are able to withdraw it tax-free when the time comes for your child to go to college.
Other Account Options
You have many choices as to what type of account to put your hard-earned money in, such as:
- Interest-bearing checking account
- Interest-bearing savings account
- Certificate of Deposit (CD)
- Index Fund
- Mutual Fund
Stocks can provide you the highest returns on your money, but they’re also the most risky. Ill-timed investments that take a turn when the market nosedives just as your child is entering college can be a real nail biter. Make sure you research your broker and do all your own research to back up your investment decisions. A securities fraud lawyer is also a good idea to have in your back pocket.
Whichever vehicle for savings you choose, remember to educate your child about their investments to arm them with the knowledge they will need later on for long-term financial success.