Amid evolving news + uncertainty surrounding COVID-19, your financial needs are our top priority.
For individual financial information, click here.
For Small Businesses, including the Paycheck Protection Program (PPP), click here.

Creating an Investment Plan for Your Child

July 15, 2019 · 5 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Creating an Investment Plan for Your Child

You just had a baby. In addition to important short-term decisions like whether to use cloth or disposable diapers, this is a great time to plan for your child’s financial future. Yay, you think, another thing added to my plate—but here’s a look at how investing for your baby now can help you set your child up for success.

Why Invest for Your Child?

Being a new parent is hard work. Sleepless nights, endless feedings, and reorganizing your life around nap schedules may leave you feeling like planning for anything but the immediate future is impossible.

Yet raising a child is expensive. There’s good reason to look ahead and consider making a child investment plan as soon as you can. The main reason to invest early is to have more time to take advantage of compounding interest.

Compound interest is an extremely powerful tool. It’s essentially the interest you earn on your interest. So, for example, if you make a principal investment of $100 with a 7% annual return, after one year you’ll have $107. Without adding anything to your principal, in the second year—if rates are the same—you’ll earn a return on this new sum, bringing your total to $114.49.

Of course, making additional investments speeds this process along, and the more time you can take advantage of compounding, the more money you could potentially make, riding the ups and downs of the market.

Starting a 529 Savings Plans

Saving for a child’s college education is often top of mind when parents think about planning for their kids’ futures. College isn’t cheap: The average cost of tuition and room and board at a private four-year college for the 2018–2019 academic year is $48,510 per year . Starting to save early with a 529 savings plan could be a smart way to cover this expense.

A 529 plan is a tax-advantage savings plan that encourages saving for education costs by offering a few key benefits. While contributions to the plan are made with after-tax dollars, the money invested inside the plan can grow and compound tax-free.

Withdrawals from the account to cover qualified educational expenses—including tuition, room and board, lab fees, and textbooks—can be made without incurring any tax.

All 50 states, as well as state agencies and educational institutions sponsor 529 plans . You do not have to choose the plan that is offered in your home state—you can shop around to find the plan that’s the best fit for you.

How to Fund a 529 Plan

Practically speaking, there aren’t really any yearly limits on how much you can save in a 529 plan. The simplest way to save may be to have even a small portion of your paycheck, say $25 a monthly, automatically contributed to the account. That way you’ll never miss a contribution, and with the money taken directly from your paycheck, you might never even notice that it’s gone.

You can contribute up to $15,000 tax-free for each child every year as a result of the government’s annual gift tax exclusion, and this could help manage college expenses for multiple children. Couples can contribute $30,000 tax-free per child. Federal rules also allow you to make a lump sum payment with a strategy called five-year gift tax averaging.

Individuals can contribute up to $75,000 in one year and couples can contribute $150,000 without incurring any gift tax. However, the strategy does use up your gift exclusion for the next five years, so if you’re planning to make other gifts, this may not be the right strategy for you.

You might want to plan to save only the amount you’ll need to cover education costs. Money in the plan can only be used for qualified educational expenses, so you don’t want to overfund the plan and end up having extra money and nothing to spend it on.

You could always transfer the account to a second child who can use the money. You could even use it yourself. But non-qualified withdrawals from 529 plans are subject to income tax and a 10% penalty on the earnings portion of the withdrawal.

As an added bonus, 529 plans aren’t only available to parents. Grandparents, other family members, or even close family friends can all open 529 plans for your child. If a plan accepts third-party contributions, they can even contribute to the 529 that you’ve already opened.

Considering a Custodial Investment Account

Another way to help jump-start your child’s investing is through a custodial investment account established by the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).

These accounts allow parents to transfer assets to a child and manage those assets until the child reaches the age of majority and can manage the accounts on their own. These accounts are a common way to save for college, but your child doesn’t necessarily have to use the assets to pay for school.

UGMA accounts only include securities, such as stocks and bonds, whereas UTMA accounts can include other types of property, like real estate or even fine art.

There are no limits on how much you money you place in a UGMA or UTMA, though parents may still want to keep the $15,000 gift tax exclusion in mind when making contributions each year.

While the parent controls assets inside custodial accounts, they irrevocably belong to the child. Parents can’t dip into them to buy things that directly benefit themselves, nor can they transfer assets between different children’s accounts. Income from the assets inside the account must be reported on a child’s income taxes and is subject to the child tax rate .

Thinking Ahead to Retirement Accounts

You can’t have a retirement account until you have earned income, and your new baby likely won’t start working until he or she is a teenager at the earliest. However, it’s never too early to start planning for retirement.

It’s worth being aware that as soon as your child is working, you are able to open a custodial IRA . The assets inside the IRA belong to you child, but you have control over investing them until they become an adult.

When to Choose a Savings Account

Investing is a long-term proposition. Investing for long periods allows you to take advantage of compounding interest and helps you ride out whatever short-term volatility may occur in the stock market.

If you think you’ll need the money you’re savings for your baby in the next three to five years, consider putting it in a savings account, such as high-yield savings, which offers higher interest rates than traditional savings accounts. Or a hybrid account like SoFi Money that earns 0.20% APY.

You might also want to consider a certificate of deposit (CD) , which also offers higher interest rates than traditional saving vehicles.

The only catch with CDs is that in exchange for this higher interest rate, you essentially agree to keep your money in the CD for a set amount of time, like five years for example.

While these savings vehicles don’t offer the same high rates of return you might find in the market, they are a less risky option and can give you quicker access to your money.

Working With SoFi Invest

When saving for long-term goals for your child, you may choose to invest. When investing with SoFi, you have two options. An active investment account allows you to take a hands-on approach to investing, choosing the investments you want to buy.

If a hands-off approach is more your style, SoFi’s automated investing can build and manage a portfolio for you based on your goals without charging a SoFi management fee.

Learn more about how to invest your money and put it to work with SoFi Invest.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.

SOIN18151

TLS 1.2 Encrypted
Equal Housing Lender