Young individuals face huge expenses in adulthood; therefore, starting early with your child’s investment plans is crucial. As per reports by the Education Data Initiative, the average price of college in the United States in 2023 is $35 551, further solidifying the significance of investing money in children.
Even if your child does not go to college in the future, they may require money for other forms of education, travel the world, buy a home, or start their own business. As per research by Nobel Prize winner economist James Heckman, every $1 invested in childhood programs can offer returns between $4 and $16. So, here are the best ways to invest money for your child’s growth:
1. Think about Stocks
Stocks are a part of company ownership allowing the users to profit from the company’s success, essentially from price increases in stock shares and from the cash distributions or dividends the company makes to the shareholders. They are the best way to invest money for a child because of the following:
- Higher rates of return than any other asset class.
- More options are to be held in different forms of investment accounts.
Ideally, the best stocks for children are from companies they are more likely to understand or interact with. Also, opt for those that can grow and pay dividends, as they can generate additional returns over the long term.
2. Opt for Custodial Roth IRAs
Parents can open a custodial Roth IRA or retirement account on behalf of their children. They control the account until their child reaches adulthood, after which the control transfers to them. Investing funds in a Roth IRA is one of the best ways to give your child tax-free funds for their retirement and a tangible way for them to perceive the usefulness of money.
Roth IRAs offer an essential tax benefit. While the contributions made to these retirement accounts are not tax deductible, IRAs grow tax-free, with the account owners enjoying tax-free withdrawals on retirement. Since Roth IRA contributions are already taxed, users can withdraw them anytime, penalty and tax-free.
Conversely, withdrawals of Roth IRA earnings before the account owner is 59 ½ years of age or before the account is five years old may be subject to penalties and taxes.
If your child wants to withdraw the Roth IRA earnings before meeting either of these requirements, exceptions, like qualified educational expenditures and first-time home purchases, may help avoid penalties, taxes, or both.
One major catch with the custodial Roth IRA is the account beneficiary, i.e., the child, should have earned income for you to contribute towards the retirement account. In 2023, you can contribute $6 500 or their earned income, whichever is less.
This means if your child earns $1 000 mowing lawns, scooping ice cream, or delivering newspapers, you can give them $1 000 to fund the Roth IRA.
3. Mutual Funds for Children Are Excellent
Mutual funds are a pool of cash collected from several investors invested in large groups of assets, generally bonds, stocks, or a blend of the two. Mutual funds may include dozens and even hundreds of stocks; thus, investing in mutual funds means investing in a wide portfolio.
This option of diversification offered by mutual fund investment reduces the risk of losing money by spreading money across varied investments. Users can diversify in several ways, like holding:
- Varied stocks across varied sectors.
- Different stocks in just one market area, for example, technology
- Different sticks across different nations
- Varied assets, like oil or gold commodities, bonds, and stocks.
Here’s how mutual fund investment works:
You buy a mutual fund at a specified price based on the fund NAV or net asset value, which is the value of all the securities, like bonds and stocks, held by the fund. The NAV adjusts accordingly with changes in the value of those securities, which primarily means fluctuating bond or stock prices at the end of each market trading day.
Also, there are two types of mutual funds: actively and passively. While actively managed mutual funds involve one or more investors buying and selling investments based on their fund investment strategy and stock research, passively managed funds typically follow all specific index rules, offering users similar investment returns.
You can hold mutual funds in varied investment accounts, like IRAs, individual retirement accounts, ESAs, or education savings accounts.
4. Choose Brokerage Accounts
Instead of opening an investment account in your child’s name, you can open a brokerage account and use it to invest money for your child’s growth. This way, you can control the account even after your child reaches adulthood.
Hence, if you have saved your hard-earned money for a specific cause, you can ensure the money is used as intended and not per your child’s desires. Also, you need not worry about handing over a considerable amount of money to an 18-year-old who may not be responsible enough to handle the same.
5. Opt for Annuities
These are insurance agreements that make a range of payments at regular intervals. Payments can start instantly or even in the future based on the annuity. Nevertheless, when investing in children, the best is to opt for deferred annuities. These are better long-term investments offering sufficient time for your money to grow.
Further, when investing in annuities, you must decide whether you want the investment to pay out in series or a lump sum. You may also choose fixed annuities that pay a guaranteed rate of interest or riskier variable annuities that offer higher returns overall.
To conclude, always choose an investment product for your child’s growth based on their life goal and age. Also, review the investment portfolio regularly and adjust it with factors like goal change, inflation, and risk appetite.