It’s never too early to start investing for your kid’s future. In fact, the sooner you start, the better. The earlier you begin investing, the more time their investments have to grow. And the more time their investments have to grow, the more money they will have when they need it most – whether that’s for college, a down payment on a house, or retirement.
But where do you start? What are the best ways to invest for your kids? And how can you make sure you are doing it in a way that is advantageous for them (and not just YOU)? Keep reading for some tips and tricks on how to invest for your kid’s future.
Start with a 529 College Savings Plan
If you’re looking for a tax-advantaged way to save for your kid’s future education costs, then a 529 College Savings Plan is a great place to start. A 529 plan is an investment account that is specifically designed for education savings. Money invested in a 529 grows tax-deferred and can be withdrawn tax-free as long as it is used for qualified education expenses, such as tuition, room and board, books, and fees.
Invest in a Child Relationship Investment
A Child Relationship Investment (CRI) account is another great way to save for your kid’s future – whether that future includes college or not. A CRI account works similarly to a 529 plan, in that money invested in the account will grow tax-deferred and can be withdrawn tax-free as long as it is used for qualified expenses. However, there are two key differences between CRIs and 529s. First, CRIs can be used for any type of expense – not just education-related costs. This means that if your child wants to use their CRI money to buy a house or open their own business someday, they can do so without paying any taxes on the withdrawals. Second, while 529 plans have limits on how much money can be contributed per year, there are no such limits with CRIs. This makes them an especially good choice if you want to give your child a head start on saving for their future but don’t necessarily want them to use all of the money right away on college expenses.
Use UTMA/UGMA Custodial Accounts
UTMA/UGMA custodial accounts are another way to invest money for your kids – although they are not technically “investments” per se. UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) custodial accounts are simply bank or brokerage accounts that are held in your child’s name. As the custodian of the account, you manage the account until your child reaches legal age – which is typically 18 or 21 depending on the state in which you live. At that point, the money in the account becomes theirs to do with as they please.
The main advantage of UTMA/UGMA custodial accounts is that they offer flexibility in how the money can be used. Unlike 529 plans and CRIs, which must be used for specific purposes (education or qualified expenses), custodial accounts can be used for anything – including non-education expenses like buying a car or taking a trip around the world. Another advantage of custodial accounts is that there are no contribution limits – meaning you can gift as much money as you want into the account each year without having to worry about hitting any caps.
Custodial Accounts Disadvantage
However, there are also some disadvantages to using custodial accounts. The first is that any money gifted into custodial accounts is considered an irrevocable gift – meaning you cannot take it back later if you need it or change your mind about giving it away. Second, while custodial accounts offer flexibility in how funds can be spent once your child reaches legal age, they also come with some strings attached prior to that point. In most states, funds in custodial accounts must be used “for the benefit of the child” – meaning they cannot be used strictly for things like college tuition (although they could be used partially for tuition and partially for other expenses). Finally, Custodial accounts are also subject to “kiddie tax” rules – meaning any earnings in the account over a certain amount (currently $2,100) may be taxed at higher rates than normal investment income.*
(*Please note: kiddie tax rules are complex and ever-changing. If you are considering opening a custodial account for your child, we highly recommend speaking with a financial advisor or tax professional first.)
There are many different ways to invest money for your kids – each with its own set of advantages and disadvantages. The best way to decide which option is right for you will depend on your individual circumstances and goals. However, one thing remains true no matter what method you choose: The sooner you start investing for your kid’s future, the better!
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