3 Ways Parents Can Invest for Their Kids – HuffPost

If you’re planning for your child’s future, socking money away into a high-interest savings account is a good place to start. The only downside is that investing your money will typically yield a better return than simply saving. Certain types of investment vehicles even offer tax advantages. Let’s take a look at some investment options that parents can use to set their children up for financial success.

1. 529 Savings Plan

College is expensive. We all know that getting a degree can lead to decades of paying off student debt. And tuition prices are still rising. If you’ve still got years to go before your child heads off to school, the cost for your child is likely going to be even higher. Contributing to a 529 plan is one way to start saving for college.

All 50 states offer at least one 529 account and it’s also possible to enroll in an out-of-state 529 savings plan. The individual contribution limits vary from one plan to the next, but some states offer lifetime limits in excess of $300,000. Each year, you can contribute up to the annual exclusion limit without incurring the gift tax. For the 2017 and 2018 tax years, the limit is set at $14,000 per child or $28,000 if you’re married and file a joint return.

You also have the option of front-loading your savings by making five years’ worth of contributions up to the annual limit all at once. That means you can put a lump sum of $70,000 into your child’s 529 account. Just keep in mind that if you go that route, you won’t be able to contribute anything else to your child’s 529 account until five-years pass.

The main benefit of saving in a 529 plan is having your contributions grow tax-deferred. As long as you use the money in the account for qualified education expenses, withdrawals are always tax-free. The tax plan passed by President Trump also lets you to use money from your child’s 529 account to cover tuition for private school in kindergarten through 12th grade.

Most 529 savings plans allow you to invest money through mutual funds. There should be enough available funds that you can pick and choose what to invest in, but it is also possible to find plans that invest in more than just mutual funds.

2. Custodial IRA

It’s never too early to start saving for retirement. If you’ve got an older child who’s working, you can set him or her up with a custodial IRA (individual retirement account). With this kind of IRA, the assets belong to your child but you have control over them until the child turns 18 or 21, depending on your state’s rules.

You can set up either a traditional or Roth IRA based on the kind of tax treatment you prefer. A Roth IRA lets your child make tax-free withdrawals when they retire. However, traditional IRAs come with a tax deduction in the year of contribution. Here’s a breakdown of Roth IRAs vs. traditional IRAs to help you decide which tax strategy is best for you.

The contribution limits ($5,500 per year) and withdrawal rules for regular IRAs still apply to custodial IRAs. The upside is that once your kids are old enough, they can take penalty-free withdrawals from their accounts for qualified education expenses or to put money down on their first home.

3. CD Ladder

Investing in mutual funds through a 529 plan or IRA means you’re subject to fluctuations in the market. If you want to hedge your bets with something a little safer, a certificate of deposit (CD) may be the answer. In particular, you should consider a CD ladder.

With a CD ladder, you purchase multiple certificates of deposit with different maturity dates and interest rates. When a CD matures, you can roll it over into a new one and keep repeating the process for as long as you want to keep saving. You won’t earn astronomically high returns with a CD ladder, but it’s a long-term savings option that isn’t a huge gamble.

Final Word

Every parent wants to put their children in the best position for success. A 529 savings account, a custodial IRA and a CD ladder can help you do just that. One key thing to remember is that your own financial future needs to come first. Before investing in any account for your kids, make sure that you save enough for your retirement.

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