Children have so much ahead of them, and parents know that it is necessary to prepare for the future of the children. Some parents know that they can’t be always be there for their children when it comes to finances in the future, so now would be the perfect time to start saving and making investments for the children. There are several investments parents can choose for their children, depending on their current financial situation, on the ages of the children and other current investments for other purposes. It would be wise to start an investment that is solely for the future utilization of your children, look for college tuition or for future expenditures.
1. 529 Plan
The 529 plan is a state or state agency-sponsored savings plan designed to encourage saving for the future higher education of a designated beneficiary. This is one of the most common ways parents can save for their children. All 50 states offer at least one 529 account, making it accessible to families within the United States. It is also possible to enroll in an out-of-state 529 savings plan.
2. Invest in Mutual Funds
Mutual funds are a financial vehicle that is made up of a pool of money collected from many investors and the money is then invested in securities such as stocks, bonds, and short-term debt. The combined holdings or grouping of financial assets of the mutual fund is known as its portfolio. When you invest in mutual funds, you buy shares in it. Each share represents an investor’s part ownership in the fund and the income it generates. There are four types of mutual funds: money market funds, bond funds, stock funds and target date funds. Of these four, the largest category belongs to stock funds. As the name goes, this fund invests primarily in stocks. Within this category lies various sub categories, one of which based on the size of the companies invested (small-, mid- or large-cap). If you prefer to start out small, there are stocks you can trade below $5.00, but you need to choose from among the best stocks under 5. Trading below $5.00 involves quick and careful decision-making as things move quickly in this category.
3. Custodial Account
Simply defined, a custodial account is a type of financial account that one person opens and maintains for another person. In most cases, parents open these accounts for their children below the age of 18. The account is opened in the child’s name, and parents deposit the money and manage the account until the child is of age. The child can then assume ownership and control of the account once he or she reaches the age of majority. This type of investment works well for your children, even beyond their college years, depending on how wisely they will manage their financial gifts.
4. Custodial IRA
There’s no such thing as saving too early for retirement. You can set up a custodial IRA (individual retirement account) for your child. You can set up either a traditional or Roth IRA, depending on the type of tax management you prefer.
Most parents prefer a Roth IRA due to its flexibility and reasonable contribution terms. Parents can contribute up to $5,500 annually and the money isn’t tax deductible. The good thing with this arrangement is that withdrawals from this account can be penalty-free once your child is old enough, and wishes to use the money for qualified education expenses or for buying their first home.
There are so many investment options that parents can avail for their children. It is every parent’s desire to prepare their children for the future. In addition, it should be also equally important to consider the current financial situation and the financial future of the parents. Parents should have a stable financial plan for the future for their own retirement and should have the capacity to set aside an additional amount for the future of their children. So, while your children are still young and you’re in your prime, think about the future and start investing for your children’s future, and for yours as well.