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Today’s question is about investing for kids; specifically, which investments are appropriate and what type of account is best to hold those investments.
For more information on this topic, check out “Ask Stacy — What’s the Best Way to Save for My Kid’s College?” and “5 Lessons That Turn Kids Into Money-Savvy Adults.” You can also go to the search at the top of this page, put in the words “kids” or “investing” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, everyone, and welcome to your money Q&A question of the day. I’m your host, Stacy Johnson, and this answer’s brought to you by MoneyTalksNews.com, serving up the best in personal finance, news and advice since 1991.
Here’s our question for today. It comes from Marlene:
What’s the best way to invest money for kids?
When my niece was born many years ago, I put aside a little money for her in a mutual fund. I intended to add to it every year, but what I did instead was totally forgot I had done it. I found it 15 years later by going to unclaimed.org, a website where you can find unclaimed money that’s been turned over to the state.
So, if you invest for a kid, don’t do what I did. In fact, after you listen to this, go check unclaimed.org and see if you’ve got any forgotten money out there.
Now let’s get to our question: How do you invest for kids? I’m going to cover two different things. One is the type of investment you should use for kids. The other is the type of investment account you can use to hold those investments.
As far as the type of investment to use, if your kid is young and he or she not going to need the money for a very long time — like until college years — you almost certainly want to invest primarily in stocks. I’d suggest a simple stock mutual fund like an S&P 500 index fund. I use the one from Vanguard myself, but there are many different funds out there that can do the same thing.
An S&P 500 index fund is a broad-based stock index fund, so it’s going to perform basically in line with the American economy. Historically, that’s been a good bet. If that’s too risky for you, you can also find mutual funds that invest in bonds, or both stocks and bonds.
If the goal is to help a youngster understand investing, another idea is buying them individual shares of stock. You can do that without a lot of money in places like Stockpile.com.
What kind of stock would a kid want? Well, you name it. How about Facebook, Disney, Mattel or McDonald’s? There are plenty of companies a kid can relate to. But if you do buy an individual share of stock for a kid, be sure to help him or her follow it. Show what the price is doing. Explain why it’s going up and down. It’ll help the child understand the stock market. One day, that kind of knowledge could come in very handy.
In summary, there are two investments to consider for young children: mutual funds and individual stocks.
Now, let’s talk about where those investments are going to go. You have several options.
First, you can do what I did: Put money aside in your name with the thought of turning it over when the kid gets older. In my case, I did end up did giving the money to my niece 15 years later after I had lost, then found it.
The advantage of this idea is that the money you’ve invested remains in your name. As long as you don’t reveal it to anyone, nobody will be the wiser should you decide at a later date you no longer want to give it away.
The disadvantage of this idea is that since the money is in your name, you’ll be responsible for the taxes on interest and gains.
The next idea is a Uniform Gift to Minors Account. This is a special account you set up for minors that uses their Social Security number, so gains are taxed at their tax bracket. That’s the good part. The bad news is that when the kid turns 18, the money’s theirs. So, if they grow into the type of person you don’t want to give money to, too bad. It’s theirs.
The third idea — and probably one of the best — is a 529 college savings plan. The money grows tax-free, and can be removed tax-free for qualified educational expenses. There may also be some state tax benefits for contributions. So, as long as that kid goes to college, this is a great way to put money aside. If the kid doesn’t go to college and the money is unused, you can get it back, but you’ll have to pay taxes, and potentially a penalty, on the earnings.
A final idea is a trust account. This is something that you’d consider if you’re investing a lot of money. If you do this, have a lawyer set up a trust for the benefit of the kid.
Those are the options, each of which has advantages and disadvantages. So, you should read more about them all before you decide what to do.
I hope that answers your question, Marlene.
Now for our quote of the day. This one comes from the poet and playwright Oscar Wilde.
“There’s only one class in the community that thinks more about money than the rich. And that’s the poor.”
You guys have a great day, and I’ll see you right here next time!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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