Investing money for a child is similar to investing for adults, but with added advantages. For starters, children have a much longer time for their investments to perform, so you can generally afford to take higher investment risks and strive for higher investment returns. Custodial accounts allow you to manage the investments for your children and hand them over once they reach age 18 or 21, depending on the state. Various college savings programs also exist that provide tax benefits to investments for children.
Step 1
Determine the objective of your investments. If you simply want to save money on behalf of your children until they reach the age of majority, your investment account choices might be different than if you want to provide college funding for your child, or even retirement savings.
Step 2
Research the available account options. Traditional custodial accounts permit you to manage your child's investments, but the funds legally belong to your child at age 18 or 21, regardless of your intentions for the funds. Accounts such as a 529 college savings plan allow you to control the disposition of the assets, even changing the beneficiary if you so desire. Additionally, college savings plans generally allow tax-free withdrawals if the funds are used for qualified educational purposes.
Step 3
Open the account. Most financial services firms, including banks and brokerage houses, can open a full range of investment accounts on behalf of your child, from custodial accounts to 529 plans to regular taxable accounts. In addition to providing basic financial information about yourself and your child, you will have to deposit funds to open the account.
Step 4
Research your investments. Take into account the time frame for your child. For example, with a young child, you have 10 or more years to allow the investments to grow, so you can afford to take additional risk with the portfolio in search of higher returns. As stocks have higher long-term average returns than bonds, money market funds, and other types of investments, you might consider using a higher allocation of stocks in the account of a younger child.
Step 5
Select your investments. If you are comfortable with your own research, invest the funds in the account based on your research. You can also work with a financial adviser at the firm where you opened the account, although this may involve higher fees.
Step 6
Monitor the account. Make your own adjustments over time or follow the recommendations of your financial adviser to keep the optimal blend of assets in the account. As your child grows, you may consider reducing the risk of the portfolio to protect against any major losses when the money is needed.
Things You'll Need
- Investable assets
- Investment account
