9 ways to invest for your grandkids

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Grandparents often want to contribute to their grandchildren’s future in the form of money for college savings, e.g. B. by contributing to a 529 plan (an educational investment account that also allows for tax-free payouts for college-related expenses).

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However, not every child chooses to go to college and there are other ways to help them save, such as: B. Buying a home or even retirement.

Here are nine ways to invest for your grandkids they’ll appreciate.

Take out a certificate of deposit

According to Bill Ryze, a Tennessee-based Chartered Financial Consultant (ChFC) and board advisor at Fiona, a certificate of deposit is a great investment because it’s low risk. “It’s appropriate for grandkids because the portfolio can be more conservative as your grandkid grows up and needs the money.”

Since a grandson probably won’t need that money for the next 20 years, a CD has time to earn and you don’t suffer from stock market volatility.

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Check out Exchange Traded Funds

Other good options, Ryze said, are exchange-traded funds, or ETFs, which can take the form of bonds or stocks.

“While they sound boring and cliche, ETFs are tax-efficient, inexpensive, and suitable for long-term investing,” Ryze said. “With ETFs, you can ensure that your grandchildren’s future investments are diversified. I suggest custodian accounts among ETFs for tax relief. They also cost [less] and will be instrumental in explaining investment policy to your grandchildren.”

Open a high-yield savings account

If you’re risk-averse and the thought of investing scares you, Ryze says you can always choose a high-yield savings account with a competitive interest rate.

“While it’s an easy choice,” he said, “it’s not always the best choice due to inflationary effects that could reduce purchasing power over time.” You can mitigate this risk by choosing a savings account with a highly competitive interest rate to beat the impact of inflation.”

Invest in real estate

One area that grandparents may not have thought of is buying real estate for grandchildren. If you can afford to buy a house with a 15 or 20-year mortgage, that house will be free and free for your grandchild when they’re a young adult — and it can then be rented out or sold, Emanuel Stafilidis said , CEO of Capable Home Buyers.

He proposed creating a family trust that would allow each property purchased to be in its own land trust within the family trust.

“Sounds difficult, but nothing a legal entity can’t set up for anyone,” Stafilidis said. “This structure protects each trait from all other traits in case something goes wrong with one trait.”

Contribute to a Roth IRA

If your grandchildren are already working and thus have an income, you can make contributions to a Roth IRA on their behalf, said Jordan Patrick, CFP and financial advisor at Commas. Then you’re really helping them prepare for their futures for a time when they might even have grandchildren of their own.

“The contribution limit for 2022 is $6,000 and will increase to $6,500 in 2023,” Patrick said. “A Roth IRA allows for tax-free distributions after age 59. For example, if contributions were made to a Roth IRA for a 15-year-old, the funds could be invested and experience the benefits of compound interest for nearly five decades. This would help leave your grandchildren with substantial tax-free wealth when they retire.”

Open a Coverdell Education Savings Account

While 529 plans are to be used for college, Coverdale Education Savings Accounts (ESAs) allow the money to be used towards K-12 students’ education expenses, according to Jason Porter, senior investment manager at Scottish Heritage SG.

“It’s an investment account that makes paying for your grandchildren’s college expenses easier,” Porter said. “You must make Coverdell payments before your grandchildren turn 18 to be eligible for a tax deduction.”

Invest in mutual funds

Mutual funds may not be as glamorous as other types of investments, said Adam Wood, co-founder of RevenueGeeks, but they can offer inexpensive portfolio variety.

“Funds can hold any combination of stocks and bonds depending on the index the fund follows or the manager’s investment decisions,” Wood said. “Mutual funds are typically available in 529 plans, and you can invest in them through a Roth IRA, a custody broker, or Coverdell ESA. I recommend examining a fund’s expense ratio to see how expensive it is compared to other funds in the same category – e.g. B. US large-cap companies.”

However, he warns against “being suspicious of putting an end-of-date fund in a custody account. In 2021, Vanguard shareholders were surprised by hefty capital gains distributions and an unexpected tax bill.”

buy shares

After all, stocks have a long track record and outperform over the long term, according to Tammy Trenta, CFP, founder and CEO of Family Financial.

“History tells us that stocks will return an average of 10% over time,” Trenta said. “If grandchildren are young and have a time horizon of 10 years or more, there are a few ways to help them invest in stocks. First set up a securities account. Depending on the state, it may also be called UGMA or UTMA.”

Grandparents can give them cash so they can buy stocks and/or give them stocks that trade at the same value they were bought for.

Build financial literacy

Sometimes a financial investment can go beyond just investing; it can teach them about finance.

“By far the best investment you can make in your child or grandchild is to provide them with financial literacy and established credit when they are young,” said Garett Polanco, an accredited investor.

He recommends the following ways to do this, which will result in kids building good credit, staying out of debt, and earning an income:

  • Add the child as an authorized user with little or no access to two credit cards. These cards must be at 20% capacity.

  • Open a bank account in the child’s name.

  • Set up a GmbH or a company and hire the child part-time for the company. Make sure the kid does the work and pays taxes.

  • Get the kid another part-time job.

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This article originally appeared on GOBankingRates.com: 9 Ways To Invest for Your Grandchildren

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