Choosing the perfect gift for the children in your life can be overwhelming. While a physical toy may be the more exciting option to tear into now, you may want to give a more substantial gift to set a little one up for a stable financial tomorrow.
Today, there are several viable options to invest in and watch your contributions grow on behalf of a child. The trick is finding the one that works best for your situation and how you think the funds will be best utilized by the child. Whether for education, retirement or future living expenses, starting your little ones out with a financial cushion now can go a long way in helping them reach their dreams.
Let’s take a look at a few popular ways you can invest today to set the kids in your life up for a bright future:
529 Education Plans
Contributing to a child’s education is always beneficial and now more flexible thanks to a recent tax reform, which broadened the use of these funds to include any qualified educational expense. Now, you can use 529 savings to cover tuition and supply costs up to $10,000 per year for your child, grandchild, niece or nephew from elementary school through post-secondary education. Then, you can use the same plan to later pay for books during their college years.1
The funds contributed to a 529 plan grow tax-deferred and can be withdrawn tax-free for qualified expenses. If you would like the money you are investing for your loved one to go specifically to their education, there are two types of 529 plans to choose from: savings and prepaid.
- 529 Savings Plans are state-sponsored and involve mutually invested funds. The state and an asset management company manage the investment over the years. The owner of the account, which would be you until the child becomes of age, can connect with the asset management firm directly to make any changes.
- 529 Prepaid Tuition Plans allow families to proactively pay for future educational expenses at an eligible institution and lock in today’s tuition rate. Also called Guaranteed Savings Plans, prepaid plans are managed by the state and education institutions.
529 plans can also be used to cover expenses for apprenticeship programs, per the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) President Trump signed into law in December 2019. Up to $10,000 of contributions can also go toward the principal and/or interest of qualified educational loans.2
Custodial accounts are a great way to contribute to a child’s future while teaching them the importance of money management and investing. These accounts are often profitable as their higher returns can yield significant growth over time. Minors can contribute money to a custodial account as well and learn the power of investing first-hand. The money held in the account belongs to the minor named on the account and contributions are non-refundable. There are two types of Custodial Accounts:
- Uniform Gifts to Minors Act (UGMA) accounts enable any individual to invest in stocks, bonds, mutual funds, exchange-traded funds and other traditional assets to grow their investments for a child.
- Uniform Transfer to Minors Act (UTMA) accounts allow alternative investments such as property deeds, vehicles and valuable art, along with traditional financial ones.
Once the child reaches adulthood, they can take control of the funds in their custodial account and use them for a house, car, education or however they want.
If a child in your life is earning an income, a Roth IRA account may be beneficial. A Roth IRA allows the child to contribute their earnings for the year or $6,000 — whichever is less — to a retirement account and watch it compound over the years.3 With a Roth IRA for kids, you can pay taxes on the income a child earns now when they are in a lower bracket. You can also invest in stocks to boost their returns and withdrawal their funds anytime, often at a lower rate than with a traditional IRA or 401(k) account.
Learning about stocks and investing is a great way for kids to kick off their money management skills. Start by opening a custodial account at a brokerage firm. From there, you can buy shares, exchange-traded funds and manage their money while teaching them the trade. Many brokerage firms today have minimum investment requirements and low fees, making this option simple and flexible. Older kids can even research investments they’re interested in to see if it is a feasible option.
ABLE Savings Accounts
Contributing to an Achieving a Better Life Experience (ABLE) account can help children with special needs prepare for the future without jeopardizing their eligibility for government benefits. ABLE savings accounts are tax-free and aim to cover qualifying disability expenses. Special needs individuals of any age can qualify for an ABLE account, but the development of a disability is required by age 26. Accounts include an annual contribution limit of $15,000 of tax-exempt money, so be sure another relative has not already opened an ABLE account. Funds can be withdrawn tax-free at any time for qualifying uses to benefit the person with a disability.4
Bonds are a traditional savings gift, which often rise in value and pay off years down the line. Savings bonds are loans you make to the government in your name or the name of a minor you are gifting to. You can purchase two types of savings bonds for a child: Series EE and Series I.
- Series EE bonds include fixed interest rates and are guaranteed to return double the amount you initially paid over 20 years.
- Series I bonds have a fixed and inflation-adjusted interest rate calculated bi-annually by the federal government to ensure your savings keep up with inflation.
You can purchase savings bonds online only through the U.S. Department of the Treasury’s website.
Another great way to set a child in your life up for a financially stable future is to open a youth savings account for them to start contributing to over time. This can teach them the importance of saving for future costs, any fees or charges to expect on their account, and quality money-management lessons for adulthood. Plus, they will have a head start on saving for important moments outside of their piggy bank.
The more they know, the more prepared they will be for the future. Spending quality time with the little ones in your life, while learning about financial health, can be pivotal in their education. APGFCU provides the tools, resources and information you need to achieve, prosper and grow. With our no-cost, one-on-one counseling, real-world financial literacy concepts and courses with our financial education partners at GreenPath Financial Wellness, we are ready to guide you and your children down the path of financial success. Plus, we make teaching children smart money habits easy with our M3 Money Club Youth Program. Your youngster can team up with heroes Cash and Violet to protect the virtual world of Megatown from Evil Dr. Spendit’s plans to destroy our savings.
Make a meaningful investment in the futures of the children in your life while supporting their goals by selecting the option that’s right for you.
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This article has been provided for educational purposes only and is not intended to replace the advice of a loan representative or financial advisor. APGFCU does not provide tax advice. The examples provided within the article are for example only and may not apply to your situation. Since every situation is different, we recommend speaking to a loan representative or financial advisor regarding your specific needs. You may also want to contact your tax advisor for additional tax information.