Investments like stocks, bonds, ETFs, and mutual funds offer significant potential for growth in the long run. While most people think of these investments when planning for retirement, it’s also important to invest for the sake of your child’s future.
Over time, your child’s investments will grow into a considerable bundle that they can use to pay for their education, start a business, or buy a home one day. It’s never too early to start investing in your child’s future. But it is critical to know how different investment accounts work and which investments are best for your child.
Take a look at our top 8 best way to invest for your child’s future!
Table of Contents
1. 529 plan
The cost of college has skyrocketed in recent years. Nonetheless, education is still a worthwhile investment and it can help your child secure more employment opportunities in the future.
A 529 plan can help you save and prepare for your child’s future education. By definition, 529 plans are investment accounts that allow you to make pre-tax contributions for your child, who is considered to be the beneficiary. Once your child reaches a certain age, they’ll be able to withdraw funds that they can then put towards housing costs, tuition, and other college-related expenses.
The withdrawals your child makes won’t be subjected to taxes as long as they are for college expenses only. Non-qualified withdrawals will result in state and federal income taxation plus a 10% penalty.
2. Uniform Gifts to Minors Act (UGMA)
A Uniform Gifts to Minors Act (UGMA) account makes it possible for parents or grandparents to transfer financial assets to a child without having to establish a trust. You also don’t have to pay the gift tax, up to a certain amount.
Funds can be invested into stocks, bonds, mutual funds, and other securities which the child will be able to claim once they are of age. When the time comes, they can use the money in the account for just about anything, from paying for college and buying a house, to starting a business and so much more!
Parents and other relatives contribute to UGMA accounts with after-tax dollars. Therefore, the earnings in UGMA accounts are subjected to taxes up to a certain limit. However, these so-called “kiddie taxes” are lower than state and federal income taxes.
3. Uniform Transfers to Minors Act (UTMA)
Uniform Transfers to Minors Act (UTMA) accounts work similarly to UGMA accounts. They are a way for parents to transfer assets over to their children without the hassle of creating a trust account.
The primary difference between these two accounts is that UGMA accounts are specific to financial assets—such as stocks, bonds, and mutual funds—while UTMA accounts are reserved for other types of gifts that are not viewed as a form of financial security.
For instance, UTMA accounts are intended to be used for real estate, works of art, patents, cars, and other forms of inheritance. UTMA accounts make it possible to transfer a larger variety of assets without having to pay a gift tax, but like UGMA accounts, the gift tax is only overlooked up until a certain monetary limit. Note that UTMA accounts are banned in Vermont or South Carolina.
4. Roth IRA
It’s never too early to get a head start on saving for retirement. With a Roth IRA, you can help your child do exactly that! A Roth IRA is a type of individual retirement account that comes with unique tax advantages.
Parents can access the benefits of a Roth IRA for their children through an IRA custodial account. Contributions to a Roth IRA are made after taxes, which essentially means you’re paying taxes upfront. As a result, your Roth IRA investments will grow tax-free.
On top of that, all withdrawals from a Roth IRA account made during retirement are virtually tax-free. Roth IRAs are powerful retirement savings accounts, and as a result, the IRS regulates how much you can contribute each year.
The annual contribution limit for a Roth IRA in 2021 is $6,000—or $7,000 if you’re at least 50 years old. Keep in mind that a Roth IRA is intended for retirement, so any withdrawals from your Roth IRA before you reach the age of retirement will result in taxes and additional fines.
5. MoneyLion investment accounts
There are many different types of investment accounts you can opt into for your child. Many come with a dedicated purpose, and they often feature limitations regarding how funds can be used or when they can be withdrawn.
If you’re looking for a more flexible way to invest for your kids, make sure to consider a MoneyLion investment account. A MoneyLion investment account features fully managed portfolios.
By partnering with Wilshire Associates, MoneyLion has developed five distinct asset allocations you can choose from based on your own preferred risk level. You can also invest based on personal interests, such as innovation or sustainability.
There are no management fees associated with a MoneyLion investment account aside from a flat rate of $1 per month. You can begin your investment journey for as little as $5 and experience no time restraints on the withdrawal of funds, meaning your children can withdraw funds for a wide array of purposes.
MoneyLion investment accounts are the easiest, most hands-off approach to preparing for your child’s financial future!
Cryptocurrencies are the latest innovation to shake up the financial world. They can be very risky investments, but nonetheless, they hold significant promise.
If you’re a true believer in the future of cryptocurrency, consider investing in this technology for your kids. Put aside as many funds as you feel comfortable with into the cryptocurrency that you feel most confident about, whether that’s Dogecoin, Bitcoin, or another one altogether.
Who knows? By the time your child reaches adult age, their coin wallet may have grown into something quite sizable. Thinking about investing in crypto? Get ahead of the game and reserve your spot for MoneyLion Crypto here.
7. Certificate of Deposit (CD)
Certificates of deposit (CDs) are backed by banks and feature higher returns than traditional savings accounts, making them a solid choice for risk-averse parents. CDs have a set length of time which usually ranges six months to five years.
For the duration of the CD, you won’t be able to access your funds. But once the CD expires, you’ll be able to redeem all of your initial capital back plus interest.
Unfortunately, CDs offer less growth potential over the long haul than investment accounts. It’s rare to even find a CD with 1% APY, as most will offer far less than 1%.
8. Savings account
A good old-fashioned savings account for kids can be a solid way to store money for your child’s future. Banks and credit unions both offer savings accounts.
However, even though your money will always be safe in a savings account, your potential for long-term gains is quite low. The national average APY on savings accounts is a mere 0.07% according to the Federal Deposit Insurance Corporation (FDIC).
This means that the money you put aside into a savings account for your child will barely grow over time. However, savings accounts are still important for short-term goals, and they are great to have in case of emergencies.
Take charge of your child’s future finances
We’ve laid out eight of the best ways to invest early for your child’s future. Each strategy has its own unique list of pros and cons, so you’ll want to take advantage of multiple investment options at once for optimal diversification.
In the meantime, make sure to explore the numerous ways MoneyLion can help you take charge of your finances and, in turn, your child’s future finances! Learn how to put aside a little extra money each month with state-of-the-art budgeting tools. With MoneyLion, you can even earn rewards on your everyday spending. Learn more here.