Best Investments for Your Grandchildren

Consider giving a gift to your grandchild that keeps on giving. You can invest money for your grandchildren that will help build a brighter financial future for them. Investments for grandchildren can vary depending on your level of risk tolerance and initial invested amount. Even if not fully appreciated in the present, investing in grandkids can help bring large rewards for them in the future.

Saving and investing for grandchildren can help to create a sense of security while providing the gift of financial freedom. Options such as custodial accounts and college savings plans can help take some of the guesswork out of the picture by helping to safeguard against the unknown. 

Quick Look at the Best Investments for Your Grandchildren:

• Custodial Accounts
• 529 Plans
• College Savings Plans
• Prepaid Tuition
• Coverdell ESA
• IRAs
• Bonds
• Stocks
• ETFs
• Savings Accounts

The Best Investments for Your Grandchildren

The best investments for your grandchildren vary depending on a few factors. Before investing, determine if your goals are more centered around protecting your principal — your initial investment — or in creating growth. Options that offer increased growth carry a higher level of risk. Review investing and saving options while thinking about how action today can help your grandchild tomorrow. 

Custodial Accounts

Custodial accounts can help secure investments for grandchildren as they grow. These accounts are managed by an adult but are placed in the child’s name. The investments within the accounts cannot be accessed by anyone other than the person named the beneficiary.

A beneficiary is a person set to receive the benefits of the account — in this case the child. Such regulations offer a heightened level of protection for the child. In addition, custodial accounts can hold a wide range of investments from stocks to bonds. These accounts do not have a monetary limit on how much can be placed inside of an account, which makes them ideal for more generous investments. 

You can try something like UNest, which makes investing for kids simple with a streamlined process and unique asset classes. Parents and any other adults who wish to contribute may do so at any time, and there are 5 options for investing, including Conservative investments, Age-Based options and Aggressive investing. Kids can access these funds when they reach the age of majority, and those funds can be used for any purpose, making UNest simple and powerful for the family.

However, custodial accounts can incur setbacks because there are no limitations on how the investments can be spent once a child reaches the age of majority. The age of majority — when a child has been deemed an adult — varies by state. Upon reaching the age of majority, a child can use the money however they want, and that means that the invested assets might not go toward education or otherwise choices. 

529 Plans

A 529 plan is a type of investment account that’s designed to focus on paying for school. The plan offers tax advantages and can be used to help pay for a wide range of college or education options. Currently, 529 plans can help with select elementary and secondary school expenses. Withdrawals are tax-free when the funds are properly used in situations to help pay for education. 

A 529 plan functions as a prepaid tuition or savings plan depending on factors such as your state. However, each type of 529 plan is not available in every state.

College Savings Plans

While relatively similar, specific college savings plans are slightly different. The 529 plans and education savings accounts are both two options that are available when investing for the future of your grandchild’s education. Specifically, college savings plans such as education savings plans allow you to save for certain education expenses that can include housing. Given the varied nature of college savings plans, review options before investing.

Prepaid Tuition

Grandparents have the option to prepay for college tuition with the added benefit of paying at the current rate. The prepaid tuition allows you to purchase credits at current prices for the future. However, the program pertains to specific schools and offers limitations on how the funds can be spent. For example, prepaid tuition generally takes into account tuition and mandatory fees.

One major benefit is that the current amount paid will likely be lower than the future tuition rate as education-related prices tend to increase over time. However, prepaid tuition usually doesn’t cover additional costs such as housing. 

Coverdell ESA

A Coverdell ESA which is also known as a Coverdell Education Savings Account allows grandparents the opportunity to pay for college. The account functions similarly to a custodial account and offers tax-free withdrawals when properly used for education. It allows you to place money into a special savings account specifically designed to be used for education. Before creating an account, realize that contributions can only go up to a maximum of $2,000 for each child per year.

IRAs

If your grandchild works and earns income, you could open a custodial individual retirement account (IRA). Investments should grow over time and having decades to earn returns before your grandchild reaches retirement age could prove beneficial. Before investing, consider the two different types of available IRAs — A traditional IRA and a Roth IRA.

Bonds

Bonds are a type of security that is often considered a safer investment. These investments have the opportunity for steady growth over time. Savings bonds are a specific type of bond that can be purchased and placed in your grandchild’s name which allows for an added level of security and investment clarity. Keep an eye on interest rates because they influence how bonds perform. 

Stocks

Stocks tend to be a riskier investment but offer the potential for higher levels of growth. Holding stocks over an extended time can help protect your investment against market fluctuation. Investing in blue stock chips, which tend to be larger leading companies in their specific industry, gains access to companies that have an increased level of profitability and stability. Before investing in stock for your grandchildren, be aware of the necessary steps that should be taken before gifting stock.

ETFs

An exchange-traded fund (ETF), can either be actively or passively managed. Actively managed ETFs include more expensive management fees. ETFs are made of bundles of securities that can range from stocks to bonds and more. In general, ETFs are considered a lower-risk investment because of their diversification and can be a useful investment idea for grandchildren due to a heightened level of stability. However, ETFs might offer lower dividend yields than other investment alternatives such as higher-risk individual stocks.

Savings Accounts

Savings accounts can help build positive financial habits while boosting future financial freedom. Before investing in a youth savings account from one of the many available options, research the interest rates, levels of account accessibility for grandchildren and minimum fees. 

Benefits of Investing in Your Grandchildren

Investing in your grandchildren can prove priceless. Help plan and secure your grandchildren’s future by placing building blocks to instill positive financial habits as well as monetary means. 

Giving them a head start: Invest early to help create a sizable investment that will have the ability to grow over time. Investments do not need to be large to make a change, especially when starting early. 

Your money has to go somewhere: Place your money in investment opportunities that can actively benefit your grandchildren such as providing the means to achieve a better education. Options such as college savings plans can help offer a way to pay for higher education.

Exiting college debt-free: Investing in a 529 plan or other college investment options can help to make higher education more attainable. Investing early for college can help alleviate the stress of college debt and allow your grandchildren the opportunity to graduate college debt-free. In addition, providing the opportunity for your grandchild to graduate debt-free could remove a mental barrier about your grandkid feeling apprehensive about entering college.

Relieving stress from parents: Investing in your grandchildren has the added benefit of taking the worry away from parents. Help lift the burden by offering a certain level of future financial stability for your grandchildren. 

Tips for Grandparents

Before investing, think about how your investment will provide the best use for your grandchild. Talk with other grandparents as well as with your kids to get a better idea about what options would be of excellent value for your family. 

Talk to the other grandparents: Speak with other grandparents to understand what their kids and grandchildren needed in a similar scenario. When in a new situation, it tends to help to speak with people who have already experienced and lived through something similar. Given that a theory is much different than practice, learning from life experience might prove useful. Speaking with other grandparents can offer alternative investment options that you hadn't previously considered. 

Invest before grandkids are even born: Investing early or before birth is an excellent way to start growing and saving for your future grandkids. This idea is especially useful once you know if your kids intend to care for children in the future. 

Discuss these investments with your kids: Before investing, speak with your kids about what they view as future concerns or needs. Likely, having such a conversation can help better guide your investments and allow the family the opportunity to work together as a team. 

Compare Custodial Accounts

Benzinga offers helpful insight into a wide range of investment opportunities for children. Before investing, review available options in terms of your financial goals for your grandchild, your level of risk aversion and the total intended gifted amount. Consider speaking with a financial professional before investing to mitigate risk. Like most investing, investments for grandkids are not guaranteed to grow. 

Frequently Asked Questions