My Favorite Investment for Kids
Starting them off on the right foot
In the months leading up to my first child being born, I spent many hours researching the best ways to invest for your kids. I asked financial professionals and other investors how they invest for their children. I received a lot of different answers and good ideas.
As soon as my daughter Lexia was born, I started a 529 plan for her. Two years later, I started one when my son Brecken was born.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings plan designed for paying future education costs. This plan allows for friends and family members to invest towards a child’s future educational costs. It allows the funds to be used to cover education expenses from K-12.
They operate similar to a your traditional 401Ks or IRAs. Contributions you make can be invest into a wide range of investment options. The money grows tax-deferred and the withdrawals are tax-free as long as it’s used for qualified education expenses.
529 plans do differ a bit as they are administered by each of the 50 states and their rules may differ. You may be able to deduct contributions from your state income taxes.
Most plans allow contributions for as little as $25. Instead of paying for a gift of diapers or toys, consider making a gift towards a child’s education. This makes great options for grandparents, aunts, uncles etc.
I live in Wisconsin and decided to invest in the Edvest plan here in Wisconsin. Each of my kids 529 plans are invested in the large cap stock index fund. Since they were born, their accounts have returned 16.66% and 18.69%. The returns are a bit different as they were started about two years apart.
They each have their own account. So at Christmas or their birthdays, any family members or friends that want to contribute are given a code and their contribution goes directly into each of their accounts.
I make a monthly contribution to each of their accounts every month. Automating the contribution makes it easy and each month money goes into each of their accounts to accumulate and grow.
Below shows the benefits of how automatic monthly deposits add up over time. As you can see the earlier you start contributing the better.
What if the funds are not used?
If the funds are not used or there is money left over, you do have some options. You are able to change the beneficiary to another family member. So if my oldest daughter doesn’t use all her funds, I can change her plan (beneficiary) to my son and he can then use the funds. If he also doesn’t use the funds, you would just have to pay the taxes and the 10% penalty to use the money for anything.
With the costs of college only rising these offer a great way to start saving for your child’s or grandchild’s education. I’d recommend talking with an accountant or tax professional on the specifics for your situation and the state you live in.
Helpful Links
Here are some helpful links on 529 plans and other investment ideas for kids.
Investopedia: A complete guide all about 529 plans.
Saving for College: An excellent site that shows the plans available by state.
Vanguard: Does a great job explaining all about 529s and the options available.
Forbes: Nice article showing the various investment options for children.
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Disclaimer: This is not investment advice. You should not treat any opinion expressed as a specific inducement to make a particular purchase, investment or follow a particular strategy, but only as an expression of an opinion.