How to Invest Money for a Child

Investing money for a child requires thought and careful planning. A thorough understanding of the wide variety of options -- each having its own benefits, disadvantages and tax implications – is essential whether you're investing money of your own, an inheritance your children receive or money they earns from employment. Choose wisely and take the necessary steps to minimize tax liabilities and maximize investment profits.

Set Goals

Step 1

Make initial decisions that set the stage for investing and make it easier to choose from the variety of different investment options. Decide whether you want to invest for college, establish a nest egg -- such as for a first house -- or get a head start on retirement savings.

Step 2

Consider how much control you want your child to have over the funds you invest once she reaches the age of majority. For example, if your goal is to save for college, consider how you will feel if your child decides to forgo college and spend the money elsewhere.

Step 3

Write a statement that, depending on the age of the child, determines a time frame for investing and outlines your investment goals and expectations.

Get the facts

Step 1

Explore options in line with your investment goals. If your goal is college savings, look at a 529 college savings or prepaid tuition plan. If you are investing with a goal of giving the child a head start on the future, consider a UGMA – Uniform Gift to Minors Act -- or UTMA – Uniform Transfer to Minors Act -- custodial accounts the child can take control of once he reaches the age of majority. If retirement savings is the goal and your child earns money from employment, consider opening a Roth IRA in your child's name.

Step 2

Look at the benefits and disadvantages of each option under consideration. Include risk and future tax liabilities in your research to get a clear picture of whether the option in question is right for your child. Information is available from a financial planner as well as a variety of websites, including Morningstar, Fairmark and IRA Kids.

Step 3

Record the information you get manually or set up a spreadsheet to make comparing the different options easier.

Dive in

Step 1

Make a choice, set up the account and monitor it regularly to ensure the investment stays in line with your goals and expectations.

Step 2

Pick an investment strategy that suits the age of the child. For example, if you are investing for college and the child is still very young you may feel comfortable taking a more aggressive approach. The closer the child gets to college age, however, the closer your investment strategy may move toward a more conservative approach.

Step 3

Involve and educate the child. Show him what you are doing, show him how his money is growing and as the child becomes older, allow him to participate in making decisions about the investments.

Items you will need

  • Paper
  • Pen
  • Spreadsheet software

Warning

  • If you plan on investing money of your own for a child, it's a good idea to first secure your own long-term financial future.

Photo Credits

  • Brand X Pictures/Brand X Pictures/Getty Images

About the Author

Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.

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