Financial education is so important and a powerful way to provide your kids with the foundation they need to build long-term wealth.
Do you want to teach your kids about saving and investing, but you don’t know how to get started?
Today, I will go over the best ways to start investing for your children.
You already know that the best time to start investing is today, so let’s get started.
Fortunately, you have time on your hands. We all know the power of compounding and by starting early, you are setting your kids up for success.
Whether you are starting at birth, or looking at college applications, here are a few options.
As minors, your children don’t have many options for opening an account other than a regular savings at a bank or credit union. Luckily for parents, there are some options for you to invest on their behalf.
Many parents believe their only option is a 529-education fund. I am here to show you there are other ways to grow wealth for your kiddos.
Let’s start with the 529-education savings plan.The name says it all: a 529 plan is an education savings plan. You can open one in any state, it doesn’t have to be the state where you live.Anyone is eligible to contribute to the plan and there are no contribution limits.
Withdrawals are tax-free if they’re used for qualified education expenses.Depending on the state where you live, contributions may be tax deductible, or you may be eligible for a tax credit on your state income tax return. Continue reading here for more information.
You can open and contribute to a brokerage account.This is one of my favorite types of investment accounts and there are some brokers who have accounts just for teens. For example, Fidelity launched its Youth Account in 2021.The account is available to teens between the ages of 13 and 17, and teens can invest in most U.S. stocks, ETFs, and Fidelity mutual funds.It also offers fractional shares, allowing teens with limited funds to invest right away.Click here to learn more.
This account won’t offer the tax advantage of a 529, although it does give teens a sense of ownership and control.It’s also a fun way for parents and teens to learn about investing together.
If you want to be in control over your child’s money, or they are just too young, you can open the account in your name.If they are old enough, you can sit down and set up a budget and decide how much to save. You can even pick investments together. It’s important to remember that selling any of the investments you make at a profit will incur capital gains taxes. Since the account is in your name, you’re likely to be paying a higher tax rate.
Open a Roth IRA account in your name.
I am a huge fan of the Roth IRA because although you don’t get the tax advantage of the Traditional IRA, all your withdrawals are tax free. And after five years of adding money, you can tap into the contributions without worrying about penalties or taxes if expenses pop up, and you can take account distributions without penalty if you use the money for qualified education expenses.
A few things to consider before you get started:
Although investing for your children is great, make sure your own finances are in good shape first. Don’t put off investing for your retirement or building an emergency fund to finance your child’s education.
Depending on how much you contribute on behalf of your child, you could incur gift taxes. Both 529 plans and custodial accounts are subject to the gift tax, which means parents are subject to an additional tax if they contribute more than a certain amount.
The good news: while there is no annual 529 plan contribution limit, only contributions up to $16,000 per donor per beneficiary will qualify as an annual gift tax exclusion.
Keep in mind the type of account you open and the account’s ownership when it comes time for students to submit the Free Application for Federal Student Aid (FAFSA). There can be implications for college financial aid. You should research them all carefully before deciding.
There are so many advantages to opening an investment account for your children.
It provides you a great way to educate your child about how the stock market works and how investing can benefit them.
Financial education is so important and a powerful way to provide your kids with the foundation they need to build long-term wealth.
