With the worst of the traumatic Covid years now safely behind us, many parents and grandparents are looking at the best way to grow savings for kids or grandkids in order to provide for their future. Whether you want to help them with their college fees or help them make a down payment on their first home, there are various ways that you can help them secure a large financial pot to help them in the future.
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- M1 Finance Custodial Accounts save for your child’s future, not just collage
- Invest on a child’s behalf and help prepare for future financial needs
- Control the investment strategy until its beneficiary comes of age
Capital at risk.
Custodial Roth IRA
Assuming the child has a earned some income from a part-time or summer job then they may be eligible for a custodial Roth IRA account. As a custodial account they will not have access to any savings until they come of age at 18, though in some states the age limit is 21. This is great as the restricted access will help teach the value of financial planning, especially if regular contributions are made to help the funds grow.
The contribution limit for the custodial Roth IRA is $6,000 and once the child reaches the age limit for the account it can be converted to a normal IRA in their name.
Any contributions made into the Roth account will grow tax-free and the account holder can make withdrawals, without incurring penalties to help cover the cost of things such as college tuition, or even to make a down payment on a property. Though the account will need to have been open and funded for a minimum of five years.
Overall, a custodial Roth IRA is a great financial product that makes a lot of sense and will not only help secure a child’s financial independence but also educate them as to the value of saving.
Mutual Funds for Kids
Another wise move for those wanting to help set children off on a financially secure footing is mutual funds. Mutual funds are a far safer way to invest in the future then traditional shares, as you are unlikely to see your investment go up in flames as can be the case when a company or sector faces an unexpected downturn.
In essence a mutual fund is a large pool of money, gathered from investors, that is then invested into a variety of different assets. These usually take the form of stocks and/or bonds that are spread out across a wide-ranging portfolio. By investing in a mutual fund, you are investing in a diversified portfolio that will include dozens or even hundreds of stocks, a great way of ensuring “diversification,” in which you reduce your risk by spreading out your money across many different investments.
The majority of mutual funds are actively managed by a portfolio manager, though some mutual funds are passively managed. Mutual funds which are passively managed are also referred to as index funds. Because they’re usually run by computer algorithms, these funds provide similar levels of diversification as with a mutual fund but at a lower cost.
529 Education Savings Plan
If you believe that they key to future success for any child lies in education, then the 592 Education Savings Plan is tailor made for the purpose. There are two types of 529 plans: Prepaid tuition plans, where you buy college credits for the future at today’s prices, and education savings accounts where you build a balance and invest your money in the market.
Unless your child happens to be a prodigy with colleges competing to offer a place then it may be best to open an education savings account. With a 529 you are given a choice of mutual funds and exchange-traded fund (ETFs) to invest in. You can withdraw funds tax-free to cover nearly any type of college expense. 529 plans may offer additional state or federal tax benefits.
Contributions are not deductible, but earnings are exempt from federal taxes and withdrawals made to pay college tuition costs are tax free. As such the 529 Education Savings Plan is a clear recommendation for those wanting to help cover the financial burden of further education for any child.
Settle in for The Long Term
These are just some options you can consider if you are looking to help set your child or grandchild up financially. There are other financial products that are aimed at helping young savers, such as the Uniform Gift to Minors Act custodial trust accounts, and even stocks or mutual traded funds can be a good choice for some. As with any investment strategy however you should be looking to invest for the long-term.
It is recommended that investments should be left for a minimum of five years in order to see any real gains. If you believe that the child is likely to need access to funds sooner, you may want to consider an alternative strategy, after all in some situations there is nothing wrong with a generous cash lump sum.
It may be tempting to put all your investment cash behind a company that you know and trust, however, diversification is key to mitigating your exposure to risk and it is therefore recommended that you ensure you have a globally diverse portfolio.
If you are more comfortable investing through a ready-made fund, then it is advisable to check the performance of the fund you are considering before you commit your cash. Where possible go beyond the last five years in order to establish the funds’ performance over the long term.
Lastly it is important that prior to deciding on the means of investment that is right for you and your child you educate yourself as to the ins and outs of the investment in question. Furthermore, depending on the age of the child in question, this can be something that you do together. Helping provide a financially secure start as an adult is one thing, but ultimately even more valuable in the long-run id providing them with the knowledge and know-how needed to make smart financial decisions for the rest of their life.
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