9 Ways To Invest for Your Grandchildren
Grandparents often want to contribute to their grandchildren’s futures in the form of money toward college savings, such as contributing to a 529 plan (an education investment account allows for tax-free distributions for college-related costs). However, not every child will choose to go to college, and there are other possibilities to help them save for, such as buying a home or even retiring.
Take Out a Certificate of Deposit
A certificate of deposit is a great investment because it presents a low risk, according to Bill Ryze, a certified chartered financial consultant (ChFC) from Tennessee and a board advisor at Fiona. “It is suitable for grandkids because the portfolio can be more conservative as your grandchild grows up and needs the money.”
Since a grandchild is unlikely to need this money for the next 20 years, a CD has time to earn, and you won’t suffer the volatility of the stock market.
Look Into Exchange Traded Funds
Other good options, Ryze said, are exchange traded funds, or ETFs, which can take the form of bonds or stocks.
“While they sound boring and cliché, ETFs are tax efficient, low cost and suitable for long-term investments,” Ryze said. “With ETFs, you can ensure your grandchildren’s future investments are diversified. I suggest custodial brokerage accounts under ETFs because of the tax convenience. They also cost [less] and will significantly serve as an investment policy statement for your grandkids.”
Open a High-Yield Savings Account
If you’re risk averse and the thought of investing scares you, then Ryze said you can always go with a high-yield savings account with a competitive rate.
“While it is an easy choice,” he said, “it is not always the best because of inflation effects, which could reduce purchasing power over time. You can mitigate this risk by choosing a savings account with a highly competitive rate to outdo the effects of inflation.”
Invest in Real Estate
One area that grandparents might not have thought about is purchasing real estate for grandchildren. If you can afford to buy a home on a 15- or 20-year mortgage, that house will be free and clear for your grandkid by the time he or she is a young adult — and it can then be rented or sold, said Emanuel Stafilidis, managing director for Capable Home Buyers.
He suggested creating a family trust, which allows each property purchased to be in its own land trust within the family trust.
“Sounds difficult but nothing any legal person can’t set up for anyone,” Stafilidis said. “This structure protects each property from any of the other properties, should something go wrong with any property.”
Contribute to a Roth IRA
If your grandchildren are already working, and thus have earned income, you can make contributions to a Roth IRA on their behalf, said Jordan Patrick, CFP and financial advisor at Commas. Then, you’re really helping them prepare for their future for a time when they might even have grandkids themselves.
“The contribution limit for 2022 is $6,000 and will increase to $6,500 in 2023,” Patrick said. “A Roth IRA allows for tax-free distributions after age 59½. If contributions were made to a Roth IRA for a 15-year-old, for example, the funds could be invested and experience the benefits of compound interest for nearly five decades. This would help to set your grandchildren up to have a significant amount of tax-free wealth in retirement.”
Open a Coverdell Education Savings Account
While 529 plans are to be used for college, Coverdale education savings accounts (ESAs) allow the money to be used for eligible K-12 students’ education expenses, according to Jason Porter, a senior investment manager at Scottish Heritage SG.
“It is an investment account that simplifies paying for your grandchildren’s college expenditures,” Porter said. “You must make Coverdell payments before your grandkids turn 18 to be eligible for a tax deduction.”
Invest in Mutual Funds
Mutual funds may not be as glamorously money-earning as other kinds of investments, said Adam Wood, co-founder of RevenueGeeks, but they can provide low-cost portfolio diversity.
“Mutual funds may hold any combination of stocks and bonds, depending on the index the fund follows or the manager’s investment decisions,” Wood said. “Mutual funds are typically available in 529 plans, and you can invest in them through a custodial Roth IRA, custodial brokerage or Coverdell ESA. I recommend examining a fund’s expense ratio to determine how pricey it is relative to other funds in the same category — e.g., large-cap US companies.”
He does caution, however, to be “leery of putting a target-date fund in a custody account. In 2021, Vanguard stockholders were surprised by hefty capital gain distributions and an unexpected tax bill.”
Lastly, stocks have a long track record and do better over the long run, according to Tammy Trenta, CFP, founder and CEO of Family Financial.
“History shows us that stocks will average 10% returns over time,” Trenta said. “If grandkids are young and have a 10-year time horizon or more, there are a few ways to help them invest in stocks. First, set up a custodial investment account. Depending on your state, it may also be called at UGMA or a UTMA.”
Grandparents can gift them cash so they can buy stocks and/or gift them stock that is trading at the same value it was purchased for.
Build Financial literacy
Sometimes a financial investment can go beyond just investing; it can teach them about finances.
“By far the best investment you can make in your child or grandchild is getting them financially literate and established credit at a young age,” said Garett Polanco, an accredited investor.
He recommends the following ways to do this that will lead to helping kids build great credit, stay out of debt and establish income:
- Add the child to two credit cards as an authorized user with little to no access. These cards need to be at 20% utilization.
- Open a bank account in the child’s name.
- Start an LLC or corporation, and hire the child part-time to the company. Make sure the child does the job and pays taxes.
- Get the child another part-time job.
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