Teaching your children the value of early investments can help them become savers from a young age. As soon as they’re old enough to understand the concept of money, sit down with your kids to explain how money can grow over time when they invest it. Before you get to that step, however, consider the best types of early investments for each child depending on their age and other circumstances.
How to Choose the Best Types of Investment Accounts for Children
The biggest deciding factor for most parents when choosing early investments for their kids is whether each child has a taxable income yet. If your children don’t yet have taxable income, federal law allows parents to open a custodial brokerage account for them under the Uniform Transfers to Minors Act or Uniform Gift to Minors Act. The account will remain in your name until your child reaches age 18 or 21 as state laws vary on the age in which young adults become responsible for their own uniform brokerage accounts.
If your child is old enough to work a part-time job or earns wages another way, you might wish to consider opening a custodial Independent Retirement Account (IRA) on his or her behalf. With a Roth IRA, the money your child contributes as part of an early investment strategy grows tax-free until he or she comes of age to withdraw it. Under the rules of Roth IRA for Kids, account holders can withdraw funds at any time as well as earmark the funds for future education, purchase of a first home, or retirement.
Other Options for Early Investments
Certificates of deposit (CD) are popular investment tools for people of all ages due to the low risk involved. With a CD ladder, you or your child purchase several CDs at the same time with different maturity dates and values. The account holder has the option of renewing each CD as it matures or combining it with the others. While this won’t bring a large rate of return, your child doesn’t run the risk of losing money that can happen with other types of investments.
529 College Savings Plan
The governments of all 50 states allow parents to put aside money on a tax-free basis to save for their child’s future college tuition. For 2020, parents or grandparents can contribute up to $15,000 toward each child’s 529 college savings plan without incurring a gift tax. If you contribute more than the annual limit, any amount over $15,000 will go against your lifetime gift tax and estate exemption. You will need to report the excess on Form 709 on your annual tax return.
Schedule a Consultation with Aura Wealth Advisors to Learn More
The above are just some of the options available to parents who want to make early investments for their children. We invite you to request a consultation with us today to learn about other options available to you as well as learn more in-depth details about the options we already presented.