Investing for your child’s future
This is one of the number one questions I get during coaching sessions. “How to I invest for my child’s future?”
Well, if you have been following me for a while, you know I always encourage people to make financial decisions based on their personal values. This situation requires a little bit of thought on what you want for your child once they graduate. Are you someone who is going to require that your child attends college? Or are you someone who just wants to ensure there is some money set aside for them upon becoming an adult?
There are three different tactics that we can discuss for investing for your child’s college, retirement, or general future. Here they are!
The 529 Savings Plan
If you are someone who truly values higher education and you see a high probability of your child attending college, a 529 plan is a great option. With a 529 plan, you can invest money specifically for educational expenses. This money grows tax free when used for qualified expenses! If the money is not used for educational expenses, you will have to pay income tax and a penalty. There are however a few ways around this. You can change the beneficiary to really any family member including yourself! What if my child gets scholarships?? If your child receives a scholarship, they can withdrawal an equal amount to the scholarship from their 529 plan penalty free. This creates a great incentive for them to do well in school! Overall, the 529 is the best option for investing for your kids college.
The UTMA/UGMA (Custodial Brokerage Account)
Maybe you aren’t 100% sure if your child is going to go to college, and you just want to have money put aside for them once they become an adult. This can be a great jump start for kids who maybe go straight to the trades after they graduate high school. Here’s some quick math on what the possibilities could be. Let’s say on your child’s first birthday you decide to invest $1,000 and continue to invest $250 per month until they turn 18. This money would grow to about $138,500 at a 10% rate of return. This could definitely cover a down payment on a house in most places! This is great option for parents looking to put money aside, without any restrictions.
Custodial Roth IRA
Maybe you don’t want to leave your child any money right out of high school, but want to make sure they are still getting to take advantage of some compound interest. Opening a custodial Roth IRA can be a great way to make sure your child gets a head start on investing for retirement. Let’s say you run a family business and decide to hire your child from ages 14-18. You pay them 10k a year and have them invest half in their Roth IRA. Even if they were to never add another penny that money would grow to about $1.3M by retirement age also at a 10% rate of return.
How do I get started?
As you can see, there are a few different options when it comes to investing for your child’s future. Sometimes it can be tough walking through the different options and deciding which one is best. Not to mention figuring out what to invest the money in once you decide which vehicle is best! That is why working with a financial coach can be super helpful in this area. Is this something you are looking for help with? Book a free conversation to learn more.