LifeGoal Investments Blog
4 Investment Plans for Kids
4 Investment Plans for KidsTeach your kids the fundamentals of investing early, or manage their accounts for them. Whichever option you choose, it could be a win-win situation as you prepare them for their future.
You’ll need to choose the type of account to open when building your child’s investment plan. The next question is, what should you invest in once the account is open?
Investment Plans To Choose From for KidsHopefully, you have a stronger idea of which investment path you’d like to follow. But if you don’t, these are the different types of investment strategies:
1. Invest in the SAVN ETF from LifeGoal InvestmentsLifeGoal Conservative Wealth Builder ETF provides you with a method of investing your money for your children’s futures. Whether you are saving for the purpose of schooling, childcare, spots, or arts, this ETF makes it clear how much money you have designated for the purposes of your children.
Your dollars will be professionally invested and actively managed, and proper research and analysis will be used to determine which global stocks and bonds will most favorably help you towards your goal.
2. Custodial AccountsThanks to UTMA and UGMA, custodial savings accounts and brokerage accounts are available to kids. You could even consider a prepaid debit card for your young ones, too. This is an option for investment plans that are tailored to future expenses, outside of schooling costs.
Let’s look at the advantages and disadvantages of custodial accounts.
Custodial accounts could provide the following benefits:
- Flexible funding. There are no distribution requirements and no restrictions on how the money will be used once it’s transferred to the child between the ages of 18 and 21.
- Low to no fees associated. Some savings and brokerage accounts may come with a commission fee for trading or a maintenance fee, so it’s best to perform your own research and find the best plan at the right price for your family.
- No contribution limits.
- Tax savings, although minimal. The first $1,000 of earnings per year is tax-free. The second $1,000 is taxed at the child’s tax rate.
- Once the money is funded to the account, it is not transferable. Think of it as an irrevocable gift.
- Your child won’t feel the impact, but custodial account contributions that are greater than $15,000 may be subject to a gift tax.
- The funds have no restrictions on the account owner. That’s why it’s advantageous to teach your child early about the importance of saving money. Once they become of age and are the account owner, they can use the money any way they see fit.
- They limit the ability to obtain financial aid. The balance in the account may be counted against the funding application, reducing the amount of eligible aid for college expenses.
- Index Funds and Exchange Traded Funds (ETFs) - Because these funds are primarily passive accounts, they have little to no management fees. They do require patience. Remember the old tale about the turtle and the hare? Slow and steady wins the race, and that’s exactly how these types of funds generally work.
- Stocks or bonds - Focus on appreciating assets! Involve your kids in the process of picking the stocks and immerse them in good money habits.
- Real Estate - permitted under UTMA, not UGMA, real estate investment trusts (REITs) are an option, allowing you to passively own real estate without the hassle of maintaining the property.
3. IRAsTraditional IRAs, investment retirement accounts, and Roth IRAs are available to kids with an earned income; however, the account cannot be opened directly in their name when under 18.
The good news is that the parent or custodial guardian can open the account to start investing in their future and reap the benefits of compounding interest.
IRAs consist of stocks, bonds, mutual funds, and other securities. They are a popular choice for adults, so why not for kids too?
Both types of IRAs limit annual contributions in 2022 to $6,000, with the ability to contribute an extra $1,000 annually over the age of 50. But, they also have differences. Let’s break those down next.
- Provide tax-free withdrawals after retirement as early as age 59 ½.
- Contributions are after-tax
- Distributions are at will. There is no mandated age (make sure to talk to your tax advisor about your particular situation.)
- Are tax-deductible
- Contributions are pre-tax
- Money growth is tax-deferred
- Distributions are mandatory after the age of 72
4. In-Trust Account (ITF)Trusts are not a common choice for investment plans for kids, but they are still an option. Actually, it’s not a bad idea to set up a trust for someone who may need guidance in spending the money.
In-trust accounts are an informal trust that comes with a low cost and provides flexibility. These hold similar funds to that of a brokerage account, including stocks, bonds, and real estate, but they also can contain cash funds.
Within the legal documents, in-trust accounts set up a donor (the person contributing to the account, also known as the “settlor”) and a trustee (the person responsible for managing the funds).
At the end of the day, the trust fund belongs to the child, and they will be able to take over the fund once they reach the legal age of 18.
ITFs do not require a deed of trust at the time of creation, which sets them apart from a formal trust fund.
5. 529 PlansIf you are searching for the best investment plan to fund your child’s educational expenses, 529 plans are right up your alley. These are specifically designed for college savings and are available through prepaid tuition or through educational savings.
Each of these accounts allows the funds to be transferable to a beneficiary or family member should the original owner choose not to attend higher education or need the funds.
They also provide tax advantages when used towards qualified educational expenses.
It’s exactly that, tuition that is prepaid. Select states offer prepaid tuition plans, allowing you to lock into the tuition rates today for your child’s future tuition expenses.
The 529 educational savings plan is a popular choice amongst parents. This plan makes putting away money for school simple, plus you don’t need to be a resident in the state you apply for the plan. However, keep in mind that you may be entitled to special rates or tax deductions if you are a resident.
The educational savings plan grows tax-free and remains this way when the funds are spent on qualified education expenses. This includes tuition, textbooks, and in some colleges, room and board. In addition to college, the funds in this account may also be used for private K - 12 schools tuition.
Choosing The Best Investment PlanBefore diving into investing, let’s review important factors to consider when deciding on the best investment plan.
What Are You Saving For?You want your child to be set up for financial success. So ask yourself:
- What are your underlying goals?
- Are you specifically planning to cover the costs for higher education?
- Are you focusing on a more generalized investment account?
Then there are others focused on growth that do not carry restrictions on spending the earnings, but can complicate applications for financial aid, for example.
It’s best to plan and be prepared for the outcome versus being surprised.
Depending on the age of your child, talk to them. If they are old enough, perhaps they can help prepare the plan and learn successful money management habits.
Does Your Child Have Earned Income?When we speak of kids, we mean children of all ages. This may relate to a newborn for some families or a teenager with a side job. Does this matter? Yes. When selecting the type of account to open, your decision will weigh upon whether or not your child has earned income.
Search for UTMA (Uniform Transfer to Minors Act), and UGMA (Uniform Gift to Minors Act) accounts with no earned income.
These include both custodial savings and brokerage accounts that begin in the parent's name and are later transferred to the child between the ages of 18 to 21.
Additional investment options open up for your child with earned income, such as IRAs.
Searching for the Right BrokerInvestment plans should leave you reaping financial satisfaction at the end. Do your research when selecting a broker for your child’s account. Look for brokers that offer:
- Little to no account maintenance fees
- No minimum deposit when opening the account (Certain investments may require an initial amount)
- Low to no commission fees - this is best when including a mix of stocks you’ll want to teach your child to trade.
- Educational resources, such as online tutorials
- Diverse portfolios
The Bottom LineCreating a plan should always be step one when planning for the future, whether your own or your child’s. Become familiar and educated with investment options before pursuing them.
Do they have restrictions? Or are there any consequences that you need to incorporate into your plan, such as tax implications or whether or not financial aid is an option?
The best investment plan is out there, so set forth and seek it out. Weigh all of your options, discovering their pros and their cons. It’s in the best interest of your child, and their adult self will thank you.
Plan for your child’s financial freedom. Include a strategic investment in your savings plan, one that may be slow-moving but will leave your child with long-term growth.
Visit LifeGoal Investments to learn more about ETFs and how you can create “boring success” over time.
How to choose the best investments for children
UGMA & UTMA Custodial Accounts
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