7 Best Investment Plans for Kids to Start Saving for Their Future (2024)

Financial literacy data collected by Champlain College’s Center for Financial Literacy states that four out of five students failed a financial literacy quiz. Moreover, the PEW Charitable Trust also found that most individuals who turn to payday loans are between the ages of 18 and 24.

By getting children familiar with the basic investing concepts at a young age, parents can introduce children to financial concepts they can carry into adulthood. Having conversations with your kids about money and making investments can help them learn how important it is to save money to invest.

By having these conversations, they can improve their financial literacy, learn more about investing, and increase their chances of meeting their long-term financial goals. This way, children won’t have to worry about trying to get rid of payday loansin the future and will be more financially stable. As parents, deciding on the best investment plans for your kids is a great way to get the money conversation started.

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The objective is to provide you with what you call a treasure trove of reliable information and helpful tools that you can use from when your child is born until they leave for college and beyond.

Here are a few of the best investment plans for kids to help you invest in your child’s future.

Best Investment Plans for Kids

Stocks

In many ways, stocks represent the ideal investment vehicle for younger investors. To name a few:

• The returns they offer are superior to any other investment type.
• There is a wide variety of investment accounts suitable for holding them.
• People can relate to them.

In my opinion, the best stocks for children are owned by companies that kids are already familiar with and interested in. In its simplest form, a stock is a claim to ownership in a corporation. You can benefit from a company’s growth by purchasing its stock and waiting for its value to rise. In some cases, you may also receive dividend payments from the company.

Stocks that can develop and have dividend payments are the best investments for kids because of the extra returns they can produce over the long term.

Custodial accounts

Custodial accounts are a great way to help your child get started in the world of investing while allowing them to learn alongside you. A custodial account is an investment vehicle set up for the benefit of a minor by a parent or other legal guardian. In a custodial account, an adult manages and makes all financial decisions on behalf of a minor.

Even though a minor has legal ownership of the assets in a custodial account, it is more common for a parent or grandparent to act as the account’s custodian, with the minor serving as the account’s beneficiary. Depending on the state, the account is given to the owner when they reach the age of 18 to 25. Until that time, the custodian and the minor can make joint financial decisions, even though the funds in the account legally belong to the minor.

Custodial Roth IRA

A custodial Roth IRA could be an option for your child if they earn money from a part-time job. When a parent opens a custodial account, they are responsible for handling the money until the child turns 18. (21 in some states).

After funding a Roth IRA for at least five years, your child can use the contributions themselves, rather than the earnings, to cover significant, unexpected expenses like college tuition or a down payment on a home.

Withdrawals, including earnings, made by your child for eligible higher education costs are not subject to early withdrawal penalties.

529 tax advantage account

A 529 tax-deferred savings plan is the best place for parents to put money toward their children’s future K-12 or higher education costs.

A 529 plan, also called a qualified tuition plan, is a tax-advantaged savings account used to fund post-secondary education. The plan allows contributions regardless of your income level and accepts contributions from anyone, whether a regular paycheck deduction or a one-time gift from a loved one.

Withdrawals from a 529 plan that covers qualified higher education expenses are exempt from federal income tax on capital gains. Funds withdrawn from the plan for purposes other than higher education will be subjected to federal, state, and income taxes and a 10% federal tax penalty on earnings.

Mutual funds for kids

Although stocks are fantastic investments, you should avoid putting all your eggs in one basket. Mutual funds are pools of capital typically invested in securities like stocks, bonds, or a mix of the two by several different investors. When investing in a mutual fund, you’re effectively investing in the fund’s entire stock portfolio, which could contain dozens or even hundreds of individual stocks.

As a result, you can spread your money out among many different investments and lower your overall risk profile, giving you the option to diversify your portfolio.

UTMA and UGMA accounts

The UTMA (Uniform Transfer to Minors Act) and the UGMA (Uniform Gift to Minors Act) are two custodial trust accounts. Parents or other relatives can open accounts for minors, who will serve as custodians until the child reaches legal majority. Depending on the state, the child can take over the account anywhere between the ages of 18 and 25.

The custodian can invest the money they deposit into the account in various financial vehicles such as stocks, bonds, or mutual funds. In addition to the account holder, other family members may make deposits.

You can use the money in the account for your child’s education or anything else that can benefit them. The heir can use the funds for whatever they see fit, be it a down payment on a house, tuition at a prestigious university, or a brand-new car.

ETFs

Exchange-traded funds (ETFs) are another option to consider when investing in children.

Similar to mutual funds, ETFs invest in various assets like stocks, bonds, and other securities. However, due to their many advantages over conventional funds, ETFs have seen massive growth in popularity over the past couple of decades.

Unlike other investments, ETFs do not settle once per day but rather trade throughout the day on the stock exchanges. That’s why people with brokerage accounts find them so appealing for making quick trades.

ETFs are typically much less expensive as most are index funds, whereas most mutual funds are actively managed. On the other hand, even actively managed ETFs can be cheaper than similar mutual funds.

Compared to mutual funds, which only provide a snapshot of their holdings every three months, exchange-traded funds (ETFs) allow investors to see their entire portfolio on any given day.

Bottom line

Helping your child to have a solid financial foundation is something that every parent wants, but making sure your child is financially responsible is also vital. Even a modest investment in a custodial IRA or 529 plan can set them on the path to financial success. These assets can help them get their footing, but they still have to learn to be financially responsible.

Therefore, financial education is as essential as investing in their future. Make sure you research and learn as much as possible about the best investment plans for kids before taking the next step. The research will help you understand what fits your needs best.

Lyle Solomon

Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a Principal Attorney.