Savings bonds, issued by the U.S. government, have long been a traditional gift for children, often timed to mature when a child comes of age or is likely to head off to college. But there are other savings bond alternatives and investments for kids that can provide other benefits, including savings accounts, stocks and other types of bonds. You can also set up an education savings account called a 529 plan for a child, and if a minor earns money, he or she can put the funds into an individual retirement account.
Banking Options for Kids
There are a number of child investment options besides savings bonds and simply putting excess allowance and birthday money into a piggy bank. For example, plenty of banks offer savings accounts geared to children, often waiving fees for small balances that they would charge to adults and providing tools to let kids and parents understand how their money is growing. Some also provide checking accounts to older kids and teens, often complete with debit cards. A parent or guardian can take a child to his or her preferred bank to open an account or look for convenient options online.
A bank account has the advantage of being insured by the Federal Deposit Insurance Corporation up to $250,000, so it can be a safe place for a child to keep funds. Setting up a bank account for a child also can help a kid get in good savings habits for later in life and generally become comfortable with the banking system.
As with any bank account, look around for options that pay good interest rates, don't charge excess fees for how you plan to use the account and offer convenient ways to put money in and get money out.
Child Investment Options
If you want to help a child invest in stocks or bonds, generally an adult must maintain an account on the child's behalf. Depending on how the account is set up, either the adult or the child will have ownership and tax liabilities related to the account, but generally the adult will always have final say over the account.
If a child or teenager has earned income, such as from an after-school job, he or she can also put money into a traditional or Roth individual retirement account. This will provide the usual tax benefits, with investments in a traditional IRA untaxed until withdrawn at retirement and investments in Roth IRAs able to grow tax free.
Contact brokerages or do research online to see what options are available. Letting a child do some stock picking can be a good way for him or her to gain research skills and some knowledge of the economy and various companies out there. Setting up an IRA can also help a child get in the habit of saving for the future.
Understanding 529 Plans
A type of investment plan called a 529 plan is designed for saving for college or trade school expenses. You can set one up for a child or anyone else.They're generally sponsored by state governments, although you don't have to choose the one set up by the state where you or the child actually resides or plans to go to school.
Generally, earnings in 529 plans grow tax free, provided that when they're withdrawn, they're used for educational expenses such as college tuition. If the beneficiary uses them for another purpose, they may owe tax plus a penalty on the earnings. It's usually possible to change the beneficiary on such plans, which can be useful if one child in a family doesn't go to college or gets other scholarship money and doesn't need the funds.
Research the investment opportunities available in different 529 plans and find one that works best for you.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.