One of the best decisions a parent can make is investing early for a child's financial future. By investing early for a child, parents invest in a solid foundation that can reap financial and lifestyle rewards. There are several options for investing for a child, and making the right choice depends on several criteria. Considerations include a parent's goals for the child's future, level of investment risk and need for parental control over invested funds when the child reaches adulthood.
Preparation
Step 1
Decide whether the goal is to save exclusively for college or to save for fund growth that can be used for any purpose in the future.
Step 2
Choose a 529 plan as a tax friendly solution if the goal is to save exclusively for future educational expenses. Choose other investment options, like a Uniform Gift to Minors Account (UGMA) or a regular savings account if the savings goals is growth of funds that can be used for any purpose.
Step 3
Decide how much control is needed over the funds. This includes control over how the funds are invested and the level of control needed over disbursement of funds when the child reaches adulthood.
Research
Step 1
Research available 529 plans if saving only for educational purposes. All states have 529 plans so research the limitations and benefits of each plan and choose according to your goals. Choose between a 529 savings plan or a 529 prepaid plan; each has its limitations on how invested money can be used.
Step 2
If not choosing a 529 plan, pick the type of savings account, bonds or investment account in which to invest funds. Align the account choice with a vision for a child's future use of the funds. Bonds and savings accounts are low risk, but fund growth is slow. An investment account consisting of stocks and mutual funds is higher risk, but potential growth is greater. Putting the accounts in your name allows for more control of funds when your child reaches adulthood, but also comes with tax consequences. A UGMA account offers tax benefits and is held in a child's name but controlled by an adult until the age of 18.
Step 3
Decide whether to invest with a financial advisor or directly with the plan if investing in stocks, bonds or mutual funds. Choose the appropriate institution, broker or advisor, accordingly. A financial advisor can guide you and answer questions on different plans and investment strategies. Go with an advisor if you do not feel comfortable making investment decisions on your own, but remember you will have to pay an advisor fee. If you can confidently understand different investment plans and their associated benefits and drawbacks, invest directly.
Step 4
If the money is put into a low risk savings or money market account for consistent growth, choose a bank or financial institution that will offer the best rate of return. Also, consider accessibility to the institution and reputation for customer service when making a final decision.
Invest
Step 1
Gather money to invest in regular or periodic intervals.
Step 2
Buy shares, stocks or funds or deposit the money depending on your choice of accounts and savings plans.
Step 3
Continue to monitor growth and adjust investment strategies over time depending on personal needs.
Tips and Warnings
- Investing in a 529 savings plan versus a 529 prepaid plan allows for more control over where the funds are invested, similar to investing in a 401K plan. When a child earns any income, opening a ROTH IRA in their name is allowed. Any job, including delivering newspapers, qualifies if income is earned. ROTH IRAs have many tax benefits so research this as another investment option when the child qualifies.
- The best way to make any decisions regarding the tax benefits or disadvantages of any investment instrument is to contact a tax professional. IRS regulations on investment accounts and taxation can change over time.
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