One of the most important things that you have to consider is what your goals are for the money you are saving for your children. Do you want to have more money for them to go to college with? Do you want to be able to help them buy them a car when they are 16 years-old? Do you want to save for your daughter’s wedding? The goal will drive which investment choice that you make. Here are three options for you to consider based on your goals.
529 College Savings Account
A 529 College Savings Account is one of the best investments for your children’s education that a parent can make. A 529 College Savings Account is an excellent option for parents looking where to invest for your children. The plan allows parents to contribute after tax dollars into the account, and the earnings and interest grow tax free. The parent can withdraw the money and earnings tax free as long as they are used for a qualified educational expense. Additionally, with a 529 College Savings Account the parent retains control over the account. So, if your child decides to skip college, you can transfer the account to another beneficiary.
If your children have an earned income, then they are allowed to own a Roth IRA. The best thing that young investors have is time on their side. A college graduate who maximizes his or her Roth IRA contributions from age 22 until retirement at 65 can see his nest egg grow to over $1.6 million dollars by the time he retires. If his parents had started a Roth IRA for him when he was cutting grass for the neighbors back in middle and high school at age 12 and then he continued the contributions through age 65, his nest egg would have been a staggering $3.6 million. And, these figures do not even include the extra $1,000 catch up contribution that he is allowed to make starting at 50 years-old.
Taxable Index Funds & ETFs
My children receive money all the time for their birthdays and for the Christmas holidays. My wife has put this money in a simple online savings account for years and has only recently decided that she wants to invest it and earn a larger rate of return than an online savings account like the Electric Orange from ING Direct or from certificates of deposit. So, another option is to open a taxable mutual funds or exchange traded funds (ETFs). We ended opening an account for our children with Betterment which is a fairly new investment company that has a portfolio of ETFs and an awesome website where you can monitor your investment and set goals for your accounts. Be sure to check out my full review of Betterment.
There are many options that parents have when deciding where to invest for your children. While there are often certain restrictions to investing for your children, they will be well rewarded later in life and in retirement for your hard work now. Do not let your children’s savings squander in a simple savings account if you do not need the money for decades. Finding out where to invest for your children can wind up being the difference between hundreds of thousands of dollars in their nest egg in the end.