You’ve probably thought about investing for your kids, but it’s sometimes hard to figure out how to start. There are many investment accounts for kids, which can get confusing. How do you decide what’s right for your situation?
Even before kids start kindergarten, someone should talk about how important saving is. As soon as kids learn to count, they should know how much money they have and how it works in real-life situations. Their investments should be something they can see, touch, and experience.
Here Are the Best Investment Accounts for Kids:
- Custodial Roth IRA
A custodial Roth IRA is an account you set up for your child so that they can save for retirement, but the money they deposit into this investment account is your own. In other words, you deposit money into the IRA first and then transfer it to the kid’s Roth IRA. There are tax advantages to this, but there are also some drawbacks. The idea of a custodial Roth IRA is that your kids can get the tax break of a traditional IRA, but the money you deposit to the IRA is on your own tax return.
- 529 Education Savings Plans
Are you thinking about saving for your child’s education? If so, a 529 education savings account might be the right choice for you. As the name suggests, this type of account allows for the flexible saving of funds for education, as well as the potential tax benefits.
The 529 College Savings Plan is a tax-advantaged investment account you can use to save for higher education expenses such as tuition, books, room and board, and other eligible expenses. Before investing in a 529 plan, you should first be aware of the plan rules and expenses. Additionally, you should speak to a tax or financial advisor to understand your objectives and to see if a 529 plan is right for you.
- Coverdell Education Savings Accounts
Coverdell Education Savings Accounts (ESAs) are savings accounts intended to help parents save for their child’s higher education. They are named after Sen. William V. Roth Jr., who proposed them. With ESAs, parents can deposit money into an account on behalf of their child, and the money can grow tax-free. Coverdell Education Savings Accounts (or CESAs) are a unique type of savings account that parents can use to save for their child’s education. Unlike 529 plans, which are intended for higher education, CESAs are used for elementary, middle, and high school. You can invest the funds in the CESA in stocks, bonds, CDs, mutual funds, or other low-interest options, and CESAs are completely tax-free.
- UGMA/UTMA Trust Accounts
The Uniformed Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) were both created to allow people to pass financial assets to minors without risking the loss of the asset in the case of divorce or bankruptcy. While both of these accounts were set up as custodial accounts, meaning withdrawals can fund the child’s assets and there are options to set one up as a non-custodial account.
- Brokerage Account
A brokerage account is different than a personal account since it is used to invest money. For example, if you use a brokerage account to buy rental properties, you may be required to pay capital gains taxes when selling those properties. Real estate investors often use these accounts. They use the investments they purchase to make money.
Your brokerage account is the money you’ve earned from investing in the stock market. You’ll automatically have a brokerage account when you open a stock investment account with a brokerage firm. The funds in your brokerage account are money you or someone else has entrusted the broker to manage.
So, kids’ investments show that they can take charge of their future. As children get older, their personal interests, like sports and music, may lead them to a specific career or job industry. It is natural for people to want an investing account for kids that lets them place their investment bets according to their interests. Investing in mutual funds gives kids a large selection of securities in deciding which career field to choose.