Once you have a child you begin thinking about not only that child’s current welfare, but their future welfare as well. In years past, people would give money to the parents of small children or babies as a way to set aside money for their financial future. But socking away gift money, even in an interest bearing savings account, won’t keep up with inflation. So is there a better way to open an investment account for your child to set aside money for their future?
1. 529 Plan
One way you could invest for your child’s future is through a 529 plan. This type of investment was specifically set up as a way to save for the college education of your child. There are tax benefits to opening this type of account for your child’s future education. In addition, contributions of up to 14K can be made each year by each parent for your child without being subject to a gift tax.
There are two different types of 529 plans you could open: The prepaid tuition plan and the college savings investment plan. There are specific rules for each of these plans and some of the rules can change depending on the state you live in. If this is an option you are thinking about I advise you to check out both the advantages and disadvantages before you make the move to invest in this way.
2. Guardian Account
A Second investment option you could look into is opening a guardian account. A guardian account allows you to own the money and withdraw it at any time for any reason you wish. You are responsible for taxes and earnings and you have complete control over the account. Basically, you are opening an account in your name but designating it as money you are setting aside for your child’s future.
The advantage of this option over a 529 plan is that the money could be used for purposes other than only an education. For instance, if you wanted to help your child purchase their first home or college car this is a way to do that. In addition, you are not subject to the same limitation as with the 529 plan, such as that of only being able to put in up to 14K per year.
3. Custodial Account
The custodial account is another choice worth consideration when you are interested in investing for the future of your child. In this case, your child owns the money and has the say in what the account is used for. Dividends and withdrawals are made at your child’s tax rate, which will likely be lower than yours. But there are drawbacks. One is that it can hurt if your child needs to apply for financial aid for their college education.
4. Life Insurance
Purchasing life insurance for your child is another way to open an investment account for them. In fact, if you find out later that your child has an illness they may not be able to get insurance. By purchasing life insurance on them when they are younger you might be providing them with the only life insurance they will ever have.
One type of life insurance you could purchase for a child is term life insurance. To do this you first purchase the policy for yourself or your spouse and add a rider for your child. The coverage is usually for a set number of years anywhere from around 10 to 30. Your child, in the event of your death, would receive the benefit.
Whole life insurance is another investment choice you could make for your child. This type of life insurance will cover them for their entire lifetime and includes a savings account. Premiums naturally cost more than with term life insurance but it is another way to build value over time.
5. Other Options
There are other ways you could invest for the wellbeing of your child. Some of those include creating a real estate investment trust, setting up an IRA account, or purchasing stocks and bonds. You could also pass on your own investments to them by naming them as beneficiaries or setting up a real estate trust.
Opening an investment account for your child is a great way to save for their future needs and ease your mind about their future. As you can see there are many options available to you for your consideration. I urge you review each of them carefully before making a move toward any of them.
What investment option do you think is the best one to save for your child’s future? Would you choose more than one?