What are the best investments for grandkids? When it comes to investment options for kids, options abound. However the best investments are not necessarily the ones that produce the highest returns; they are the ones that teach the kids the value of money and instill lifelong wealth building habits in them. Some of the popular investments for kids are savings accounts, savings bonds, mutual funds and individual stocks.
Types of Investments for Grandkids
Savings accounts are a popular option for kids. Although the average return on a savings account is very small, the idea of having their own bank account can be exciting to any kid and can be one of the best gifts that a grandparent can give a child. Take them along to the bank when you deposit and withdraw money from their account, or even better help them to do it. What better way to teach them about money and show them that money grows over time through the interest earned?
Savings bonds are another safe avenue for kids which also do not cost a lot of money. In fact, nowadays many grandparents gift their grandchildren savings bonds rather than spending money on toys or other instant-gratification gifts. Even if the kids may not be able to appreciate the gift now, they may thank you abundantly later on. While younger kids can go for savings accounts and savings bonds, mutual funds and individual stocks are more suited for older kids.
Investing for College and Retirement
When it comes to investing, children have a strong advantage over adults; a much longer time frame for investment. The power of compounding makes it possible to make millions out of pennies saved each week. Saving for college is a more immediate objective while kids can even start saving for their retirement when they are young.
Many grandparents wish to contribute, at least partially, to their grandchildren’s education. Funding a grandchild’s tuition and other education expenses is exempted from gift tax and is a valuable estate tax planning tool, making it beneficial to both parties. 529 plans allow a grandparent to set aside funds for their grandchildren’s higher eduction while, at the same time, retaining ownership of the assets, which can come in handy in case of an unforeseen emergency. Grandparents who wish to contribute to Coverdell accounts should however discuss with the parents of the child before making a contribution. The total allowable contribution to a Coverdell account in an year is $2000 and anything that exceeds that figure will be subjected to a penalty, so make sure that the total contribution from all the related parties do not exceed that limit.
Older children with earned income (through babysitting, mowing the neighbor’s lawn or helping their parents in the family business) can contribute to a Roth IRA. Although Roth IRA contributions are after-tax dollars, most children have less income than the threshold limit to be worried about taxes. These contributions can remain and grow tax-free in the account for more than forty years until they reach retirement age. The icing on the cake is that all of this can be withdrawn tax-free at retirement without paying a penny to Uncle Sam. It is even possible to withdraw money from Roth IRA for higher education purposes.
The best investment for grandkids is of course to teach them to save money and spend wisely. Encourage children to save money for an immediate goal, teach them to give to charities and to forgo instant gratification for a bigger and better goal. If you teach them the basics of money management, they will grateful to you regardless of whether you saved a lot or only a little.
1. Coverdell Education Savings Accounts by IRS, https://www.irs.gov/newsroom/article/0,,id=107636,00.html
2. Introduction to 529 plans, https://www.savingforcollege.com/intro_to_529s/what-is-a-529-plan.php
3. Introduction to Roth IRA, https://www.rothirarules.net/
Image Credit: Matt Mcgee, https://www.flickr.com/photos/pleeker/2740887564/