What Are the Best Investments for Grandchildren?
Grandparents love spoiling their grandchildren now, but many also want to help their grandchildren's future. Helping your grandchildren save for the future means finding the best investments for grandchildren.
Fortunately, there are many options, including accounts with tax advantages, to help you provide your grandchildren with help for their future.
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The Purpose of Investing for Grandchildren
Investing for grandchildren gives them a nice foundation to start their adult life. We all know how expensive it is to buy a house, start a family, and cover the daily cost of living. So when you save or invest money for your grandchildren, you help them get a head start on their future.
14 of the Best Investments for Grandchildren
These 14 best investments for grandchildren help you save for your loved ones, providing them with help for their financial future.
1. Fidelity Youth Account
A Fidelity Youth Account can help teens learn how to invest at a young age. The app is for teens ages 13 - 17, allowing them to trade in the stock market, including stocks, exchange-traded funds, and Fidelity mutual funds.
The account is a custodial account, so grandparents or parents must own it, but kids can manage their investments. A Fidelity Youth Account is a great way to support your grandchildren's future while empowering them to learn money management with a brokerage account.
2. Acorns Early Account
An Acorns Early account is another custodial account that grandparents or parents can own, with accounts for kids too. Acorns Early offers a few prebuilt portfolios kids and teens can invest their funds, but all accounts automatically start with the 'aggressive' portfolio. If you want something more conservative, you can adjust your portfolio, but it can trigger a tax liability because Acorns will sell the existing investments and buy new ones.
The nice thing about the Acorns Early account is kids or grandparents can invest spare change in a brokerage account, and kids can use the funds for any purpose, not just college.
3. Coverdell Education Savings
If you want to help your grandchildren with college expenses, a Coverdell Education Savings account may help. Your contributions are after-tax (you don't get a tax deduction), but the contributions and earnings grow tax-free.
The withdrawals are tax-free if your grandchildren use the funds for qualified education expenses in K - 12 or college. However, any funds used for other purposes will incur a 10% penalty and taxes on any investment gains.
4. College Saving Accounts (529)
A College Savings Account, or 529 plan, is a tax-advantaged account you can start for your grandchildren's future. Like Coverdell Education Savings Account funds, the contributions don't provide a tax deduction; however, the contributions and earnings are tax-free. So if your grandchild uses the funds for qualified educational expenses, they don't pay taxes on the funds.
Like Coverdell plans, the funds can be used for educational expenses for K - 12 or college. Each state's plan has different contribution limits, but typically, you must abide by the federal gift limit of $16,000 in 2022.
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5. Tuition Prepaid Plan
Prepaid tuition plans are a great way to fund your grandchildren's future tuition. With these plans, you freeze today's tuition rates no matter when your grandchild goes to college. So, for example, if you invest in prepaid tuition plans and your grandchild was just born, your grandchild will get today's tuition rates in 18 years.
If your grandchild doesn't attend college in your state or doesn't attend a state school, you may be able to transfer the value or get a refund.
6. Roth IRA
If your grandchild works (even if it's a small summer job), you can open a Roth IRA in their name. You can then match their contributions. Even if your grandchild doesn't contribute to their IRA, you can contribute up to their annual income.
For example, if your grandchild worked at a fast food restaurant and earned $1,500 last year, you can contribute up to $1,500 in that tax year.
7. Mutual Funds
Mutual funds are a diversified set of investments that you invest in with a pool of other investors. They have the benefit of already being diversified, so you don't have to do any legwork to buy different assets.
You can buy mutual funds through your grandchild's custodial IRA or Roth IRA, helping them reach their financial goals.
Grandparents can open a Greenlight Invest+ account for grandchildren that puts kids in the driver's seat, helping them learn how to invest. Greenlight is another example of a custodial brokerage account that lets kids handle their investment account while parents or grandparents oversee it.
The Greenlight account comes with a savings account and debit card, allowing kids to decide how to save, invest, and spend their money. Parents or grandparents must link their bank or investment account to the Greenlight account and approve any investment account activity before kids make trades.
9. General Savings Account
A general savings account is a great way to help your grandchildren with their future. While they aren't necessarily an investment account, an online high-yield savings account will earn interest, helping your grandchild's money grow.
You can open a savings account in their name and fund it or make a deal with them to match any contributions they make to their savings account. This teaches your grandchildren how to save while rewarding them for their efforts.
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If you open a custodial brokerage account in your grandchild's name, you can purchase stocks for them. If you invest in the stock market for your grandchild, consider including them in the decisions. Let your grandchild choose companies they are familiar with or believe in so they can see how investing works.
Be careful of the tax liabilities stocks can create, though. For example, custodial brokerage accounts may have some tax breaks, but parents or grandparents may be on the hook for some tax liabilities.
11. Custodial Investment Account
Custodial brokerage accounts can be a UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act). With either account, you put money away for your minor grandchildren, and the account gets transferred to them when they reach maturity, usually 18.
Grandparents can contribute up to the federal gift limit ($16,000 in 2022) without triggering a tax liability.
12. Savings Bonds
Consider savings bonds if you prefer a simpler investment method for your grandchildren. They are a conservative investment that grows slowly and are best for investors who will hold onto them long-term.
If your grandchildren hold onto their bonds for 20 years, they will receive double what you paid for them, but they will owe federal taxes on the earned income.
13. Collectables (Coins, Gold)
Investing in collectibles can be a fun way to invest for your grandchildren; however, remember there's no guarantee the collectibles will be worth more than you paid. The capital gains tax on collectibles is also high, but it can be a good way to diversify a portfolio or gift collectibles you already own.
14. CDs (Certificate of Deposit)
CDs are also a low-risk investment but can be a good way to ensure your grandchildren see a return on the money you invest in them. Long-term CDs are one of the best investments for grandchildren because they are FDIC-insured, and the return is guaranteed. So if you're investing in your child's educational future, for example, you can invest in a long-term CD and get them a higher APY.
Risk of Investing for Grandchildren
Even the best investments for grandchildren can have downsides. So understanding the risks when investing for your grandchildren is important.
Taxes After Death
Taxes are the number one risk of investing for your grandchildren. Unless the funds are in a tax-advantaged account, like college savings plans, they'll likely owe taxes on any capital gains. This can greatly decrease their earnings. However, if you wait to transfer the funds upon your death, your grandchildren get access to the funds tax-free and only pay taxes on any earnings made from the value on the date of your death. This could save them a lot of money, making your investments worth it.
Inflation is another big risk when investing in your grandchildren. You might think you saved a lot for them, but with inflation rates, the money you have for them today won't have the same buying power 10 - 20 years from now.
If you open a custodial brokerage account for your grandchildren, you maintain it while they are young. Once they are 18, though, they must take over the account and maintain it. Unfortunately, if your grandchildren don't understand how to maintain control of an account or don't pay attention, they could lose the money you worked so hard to save for them.
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Tips Before Starting a Savings Account for Grandchildren
Before starting a savings account for grandchildren, consider these tips.
- Consider who will own the account
- Pay attention to the federal gift-giving limits so you don't incur taxes
- Find a savings account with the highest APY
- Use a savings account that provides you with alerts while the child is under 18 so you're aware of how the funds are used
Are Savings Bonds a Good Investment for Grandchildren?
Savings bonds are a conservative investment. They are best for long-term investments. However, while they aren't risky, they also won't have a large return on your investment.
What Is the Best Way to Give Money to Grandchildren?
A custodial brokerage account is the best way to give money to grandchildren. This way, you aren't just giving them money, but you are investing in their future, giving the money a chance to grow.
What Is the Best Way for Grandparents to Save Money for Grandchildren?
The best way for grandparents to save money for grandchildren is the way that resonates the most with their risk tolerance. For example, if you like investing and want an aggressive portfolio, open a custodial brokerage account and let your grandchild invest. On the other hand, if you prefer more conservative investments, choose things like CDs, savings accounts, or savings bonds.
How Do You Open a Custodial Account For Your Grandchildren?
To open a custodial account for your grandchildren, you must provide proof of their identity, social security number, and birthday. In addition, there must be a custodian for the account, which can be you or the child's parents.
How Do You Pick The Best Investment With Tax Benefits?
Tax-advantaged accounts for grandchildren include college savings plans or Roth IRAs (if they work). If you think your grandchild will go to college, college savings plans are the best way to provide them with tax-free support.
The Bottom Line
The best investments for grandchildren are the most comfortable investments, as you'll be the custodian until they are 18 years old. Work with your tax advisor to determine the best way for you to help your grandchildren with their future.