What Is The Best Way To Invest For My Grandchildren?

The best way for you to invest for your grandchild depends on several factors, including the child’s age, how much money you want to invest, what instruments you wish to invest in and more. Luckily, you have plenty of options to consider. No matter how much money you have, there is an investment vehicle you can use to help your grandchild get a financial head start in life.

Some options that grandparents often consider include:

• CDs
• Savings bonds
• Mutual funds
• ETFs (exchange-traded funds)

You can also explore a variety of investment accounts designed for specific goals, such as helping your grandchildren to pay for their educations.

Can Grandparents Open An Investment Account For Grandchildren?

Yes, grandparents can open investment accounts for their grandchildren. Not every brokerage or trading platform will let you, though.

Typically, grandparents choose to open custodial brokerage accounts, especially when the children are too young to have jobs that make money.

You don’t have to limit yourself to a custodial account, though. Several brokerages have investment accounts that focus on helping teenagers learn how to invest wisely.

For pretty obvious reasons – most teens aren’t very good at managing money – you or someone else controls the account. At the same time, the teen is involved in making decisions. If you think they’re making poor selections, you can restrict them. Otherwise, you might want to let them control most of the decisions so they can learn how to balance risk and reward.

At this point in their lives, teens and younger children can stand to make a few risky moves. They have plenty of years to invest. Learning from a mistake now could set them up for long-term success as knowledgeable investors.

Can I Buy Stocks For My Grandchildren?

Yes, you can buy stocks for your grandchildren. In fact, it’s one of the most effective ways to help them build financially secure futures.

Obviously, your grandchildren cannot manage their stock portfolios unless they are adults. That’s why you will want to buy stocks through a custodial account. Many companies offer custodial account services with low fees and small minimum investments. Expect to spend $100 to $500 opening a custodial account. You will also pay a small fee (usually less than $10) per trade.

Choosing a responsible custodian is the key to making this option work well for your grandchildren. If you have experience buying and selling stock, you might perform this task on your own. You may also want to ask an investment-savvy relative to manage the account.

Buying stocks for your grandchildren through a custodial account has its pros and cons. Your investment has significant growth potential as long as the custodian chooses successful stocks. There’s also a fair amount of risk in buying stocks. If the custodian makes unsuccessful decisions, you could lose a good portion or theoretically all of your investment.

Ideally, the account custodian should build a balanced portfolio that includes high-risk and low-risk stocks. Since this account will likely generate money for years or decades, you can accept a little more risk than usual. You don’t want to take it too far, though. Put some money in new companies with growth potential and balance out that risk by investing in established businesses that have been profitable for decades.

Are Savings Bonds A Good Investment For My Grandchildren?

Savings bonds from the U.S. Treasury aren’t going to earn your grandchildren a high return on investment. They do, however, offer reliable returns.

Also known as series EE bonds, savings bonds are backed by the U.S. government. That means they can generate a predictable return. You wouldn’t use them as your primary investment, but they’re an excellent option for balancing higher-risk investments.

As of January 2022, the Treasury says that the current rate for savings bonds is 0.10%. Those bonds are expected to double by 2042. That amount of time doesn’t sound great to most adult investors. It makes a lot of sense, though, when grandparents buy savings bonds for their grandchildren.

(Keep in mind, however, that the Treasury only guarantees a 2X return after 20 years. Redeeming a savings bond before it has five years to mature will mean you forfeit three months of interest.)

When the bonds mature 20 years from now, your grandchildren can use the investment to fund major life events, such as going to college, buying a home, and starting a family.

Currently, you can buy anywhere from $25 to $10,000 of U.S. savings bonds per year.

Should I Buy Post Office Savings For Grandchildren?

The U.S. Postal Service no longer sells post office savings bonds. Some countries, including the United Kingdom and India, still offer post office savings accounts and similar services. They have very low interest rates, though.

If you’re considering a post office savings account, you should probably explore online savings accounts that offer similar or higher interest rates.

Are CDs For My Grandchildren A Good Investment?

Certificates of deposits (CDs) are extremely safe investments. Like money you keep in your bank account, CDs are protected by FDIC insurance (Federal Deposit Insurance Corporations), which essentially means that they’re backed by the U.S. government up to $250,000.

That’s the good aspect of putting money into a CD for your grandchildren. Unfortunately, the low risk means that you will also get low returns. Most five-year CDs have interest rates between 1.0% and 1.3%. Shorter terms mean lower rates. For example, a three-month CD will probably pay 0.40% at most. These returns are much lower than some of your other investment options.

Consider what your grandchild will get from a $5,000, three-year CD with a 1.3% interest rate that compounds monthly. When your grandchild cashes it in, they will get $5,198.74. The investment only made $198.74. To make matters even worse, inflation rates can devalue the principal investment and interest. Your grandchild could actually end up getting less value than you spend on the CD.

Overall, this is not a great option. It’s very safe, but it doesn’t make much – if any – money.

How Do I Set Up A Trust Fund For my Grandchildren?

Setting up a trust fund for your grandchildren isn’t as challenging as it might seem. You will, however, need to meet with a lawyer with experience in this area. A trust, after all, is a legal arrangement.

Some of the things you should consider before committing to a trust include:

• When do you want your grandchildren to have access to the trust? You have control over the date or age of the beneficiary.
• Should your grandchildren receive lump sums or have payments spread out over time?
• Do you want your grandchildren to use the trust for a specific expense, such as to buy a home?

Should I Invest In Stocks Or Bonds For my Grandchild?

You don’t have to choose between stocks and bonds. You can invest in both for your grandchildren.

Investing in stocks creates more opportunities for high returns. Individual stocks are also riskier than bonds, so there is a chance that you could lose money.

Bonds are very reliable, but they do not generate high returns.

Building a portfolio that includes stocks and bonds can help hedge against risk while earning more money. Even if some of the stock investments don’t work as planned, the bonds will provide a specific return.

Are Mutual Funds or ETFs Better For Grandchildren?

Mutual funds and ETFs have a lot in common. For example, they both contain a broad variety of investments to help generate high returns while controlling for risk.

The biggest difference between mutual funds and ETFs is when you can trade them. You can buy and sell ETFs just like you would stock. The prices go up and down throughout the day, so you can try to time your trades to maximize returns.

Mutual funds, however, only get traded at the end of the day. You don’t have as much flexibility with them.

That difference matters a lot to active traders. It probably doesn’t mean much when you invest for your grandchildren, though.

More likely than not, you will manage your grandchildren’s mutual funds and ETFs passively instead of actively.

It probably doesn’t matter a lot whether you choose ETFs or mutual funds. It’s much more important to choose a specific mutual fund or ETF that produces long-term returns for consistent growth.

How Do I Save For Grandchildren Tax-Free?

Some investment options will help you avoid paying taxes on your contributions. If you want to save for your grandchildren tax-free, consider contributing to 529 educational plans. No one will pay federal taxes on the investment or withdrawal (as long as you and your grandchildren follow the rules).

You can also find tax-free ETFs and mutual funds. In these cases, though, you’re shifting the taxes to your grandchildren when they withdraw the money.

Roth IRAs work the opposite way. You contribute post-tax money so your grandchildren can withdraw funds without paying taxes.

You can also will money directly to your grandchildren. You don’t avoid taxes, but you also won’t pay more than you already do on your income.

Best Investment Accounts For Grandchildren

The following investment accounts stand out as some of the most popular options for grandchildren.

529 Savings Plan

A 529 savings plan is a great option for helping grandchildren pay for their educations. The plans can vary quite a bit from state to state, though, so you should look at your state’s option before investing money. Most states will also let non-residents contribute to 529 savings accounts. You might not get the same benefits as the state’s residents.

The immediate benefit is that you don’t have to pay federal taxes on the money you put into a 529 account. Perhaps even more importantly, the federal government doesn’t tax money taken out of the account as long as it gets spent on approved expenses.

Other benefits include:

• High maximum lifetime contributions between $235,000 and $550,000
• Availability to anyone who wants to help fund someone’s education.
• Hands-off management.
• Options to change plans up to twice per year.

529 savings plans can pay for private K-12 school, so it isn’t just for people who want to attend college.

Roth IRA

Roth IRAs usually work remarkably well for grandchildren because the money gets taxed before it goes into the account. That means your grandchildren can deduct money from the account without paying any taxes on it (as long as they don’t try to deduct money too early in life, in which case they may need to pay penalties).

With a Roth IRA, the money you invest will compound over time. You can only contribute up to $6,000 per year $7,000 if over 50). Over the next several decades, though, that money will grow considerably, giving the beneficiary a tremendous head start.

There’s one important thing to remember about opening a Roth IRA for your grandchild, though. You cannot do it until the beneficiary has a job that earns at least $2,000 per year. The amount of earnings your grandchild reports partially dictates how much you can contribute to the Roth IRA.

If they make $2,000 in 2022, you can contribute $2,000. If they make $3,584, you can contribute $3,584. You only have to stop when you reach $6,000.

The compound nature of this investment is what makes it such a terrific option. Let’s say you put $5,000 into a 15-year-old’s Roth IRA. Assuming a return of 7%, that $5,000 will turn into $147,285 by the time the beneficiary turns 65. Just think about how much more they will have when you contribute the maximum amount every year.

Coverdell Education Savings Account

Coverdell Education Savings Accounts aren’t quite as flexible as 529 accounts. They can, however, play a role in funding your grandchildren’s educations, including K-12 and college.

The money that you put into a Coverdell Education Savings Account never gets taxed by the federal government as long as the beneficiary uses it to pay for educational expenses. The beneficiary must use the money before turning 30. Beneficiaries with disabilities do not need to follow that restriction.

The only downside is that you can invest limited funds per year. The annual Coverdell education savings account contribution limit is just $2,000 per year. With today’s high tuition rates, that probably will not pay for a college education. It can help considerably, though. If you open an account when the child is born, you will probably have about $36,000 to help them pay for college.

Custodial Accounts

Custodial accounts can work very well as investment options for your grandchildren because they charge low fees and can grow considerably over time. You would choose this option when your grandchild is a minor. Then, you would assign someone – potentially yourself, a parent, or guardian – to manage the account.

Most brokerages with custodial accounts make it easy for investors to explore their options. Expect to pay a fee for each trade you make, though. Ideally, the custodian will establish a successful investment strategy and let the account grow over time with little to no tinkering.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.