Do you want to set your kids up financially for the future? Then it is time to start investing with Flyte! In this article, we are going to look at the 5 best investments for kids. We will show you exactly where to invest money so you can afford to send your kids to the best college and help them buy their first home!
With so many different platforms and strategies out there, investing for kids can seem a bit daunting. Don’t worry, if you stick to these 5 investment plans, you will have no problem with long-term savings for your children:
- Custodial Roth IRA
- Coverdell Savings Accounts
- 529 Savings Plans
- UGMA/UTMA Custodial Accounts
- Brokerage Account
Keep reading to find out these different investment accounts for kids and work and learn if they are right for your family!
A Custodial Roth IRA is a retirement account set up for the benefit of your child. This IRA for kids works similarly to a standard IRA, except that you control it until your child reaches the age of 18 or 21 in some states. Once your child reaches adulthood, you then transfer the account to them. The great thing about this retirement account is that all gains are tax-free. There are no capital gains on earnings as long as your child waits until they are 59 ½ to start withdrawing.
What is a Coverdell education savings account? A Coverdell ESA Is a specialized custodial account that allows your child to take tax-free distributions to pay for college or other approved educational expenses. You are able to contribute up to $2000 to your Coverdell Education Savings account and invest in virtually any asset class, including bonds, stocks, mutual funds, ETFs, and real estate. By starting a Coverdell ESA early, you can give your child a massive head start in life and prevent them from drowning in college debt.
A 529 Plan is another investment account for kids similar to a Coverdell ESA. With this account, your child can make tax-free withdrawals to cover virtually any college expense, from tuition to housing to textbooks to trips. Earnings are not subject to capital gains tax as long as the money is used for education-related expenses. The big advantage a 529 Saving Plan has over a Coverdell ESA is the limits. With a Coverdell ESA, you can only contribute up to $2000 per year, while 529 Saving Plans do not have yearly maximum contributions, and with plans, you can contribute $350,000 or more over the plan’s lifetime.
UGMA/UTMA custodial accounts allow you to hold and invest money for your child without going through the effort of setting up a trust. These custodial accounts do not have special tax benefits compared to the other savings accounts we have listed, but earnings are taxed at the child’s tax rather than your own. This can result in substantial tax savings if you are in a high tax bracket. Money from UGMA accounts can be withdrawn by your child when they become an adult, and there are no limits on what they can withdraw or spend the money on. The best UGMA accounts include Flyte and Charles Schwab.
You can open a custodial brokerage account for your kid and then transfer control of the account to your child. With a brokerage account, you can invest in every asset class imaginable, from stocks to commodity markets to real estate and even cryptocurrency. A custodial brokerage account does not offer any special tax benefits, but like a UGMA account, earnings will be taxed at the child’s tax rate, not yours. One of the best investing apps for custodial brokerage accounts is Flyte.
The most important rule of investing is don’t lose money! Contrary to popular belief investing is largely about capital preservation rather than trying to strike gold and get rich. As you are investing for your child’s future, you should be looking for low-risk consistent gains that earn you a modest return. Typically, a mix of stocks, bonds, and real estate is a sound strategy. You can easily get exposure to these asset classes via liquid ETFs with very low fees.
Investing is often very boring, and there is always a risk you will lose money. You are better off just buying major ETFs consistently with your monthly and yearly savings and just letting your investment compound over many years. Avoid trying to time the market and trade stocks.
Investing and banking for kids don’t have to be difficult. You can quickly set up a custodial account for your child, make modest yearly contributions, and 18 years later have built an incredible nest egg that they can use to pay for college, buy their first home or start a business!