How To Invest For Your Kids: Secure Their Financial Future

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There are many benefits to investing for your kids when they’re young. In addition to the exponential effect of compound returns over long periods, you also have the ability to set up different investment plans to capture that opportunity.

One option is opening an individual retirement account (IRA) for your child. These deposits are typically made with after-tax dollars, but can grow and compound tax-free. Depending on income levels, contributions to these plans can have tax advantages as well. Even small contributions have the power to compound meaningfully over time, and IRAs have the benefit of a very long time horizon to help secure your child’s financial future.

Another way to plan for the future is with the 529 plan, which is a tax-advantaged savings plan used for education costs. Much like IRAs, contributions are typically made with after-tax dollars, but the money invested can grow and compound tax-free. Withdrawals from the account to cover qualified education expenses, including tuition, room and board, lab fees, and books, can be made without incurring any tax.

The final investing option is opening a custodial brokerage account. Many financial institutions offer low or no-fee custodial brokerage accounts. The gains in brokerage accounts are taxable in the year incurred, but offer the owner the flexibility to use the funds for any purpose. They also offer higher liquidity than the age or purpose-based limitations imposed by IRAs or 529 plans.