One of the best ways to indulge your kids is to teach them the value of money. That can happen simply by helping them invest in their future through different investment opportunities. Ensure that you explain these things to your kids and your grandkids as they get older, so that they know how to grow and use their savings.
529 College Savings Plan
Every state has 529 college savings plans, often referred to as a 529 plan. Basically, it’s a savings plan to cover college costs individual to each state. However, children are free to use the money in the account for any state, though it might not be enough to cover tuition depending on the school your grandchild wants to go to. The best thing to do is read all about 529 plans on this government website:
Roth Individual Retirement Account (IRA)
As soon as your grandchild has earned income, they can open a Roth IRA account and you can help them get started. They can donate up to $5500 a year if they earn that much through working. Money saved today and compounded over time makes more money. If your grandchild starts as soon as they get a summer job, they’re going to be that much better off if you help them top off their contributions each year. You can read more about IRAs for kids on this website:
Coverdell Education Savings Accounts (ESA)
ESAs are popular because withdraws are usually tax free if being used for a qualified education expense. Donations aren’t deductible on federal tax and each state differs how they treat these accounts, but they can be very beneficial to help pay for school with tax-free earnings money. It’s a great way to save money that can be used for school or other purposes, but it will be treated differently when used for qualified educational expenses. To learn more about Coverdell Education Savings Accounts, read these FAQ:
Trusts
If you have enough money, another way to set up money to help your grandchildren is a trust. A great thing about trusts is they can lower your estate tax, yet pass on the money to your heirs. You may be subject to generation-skipping tax if the trust is over one million dollars, but it’s equal to any other gift tax you may be subject to. You can set up trusts for all kinds of purposes, though, and have a lot of control over the funds to help your grandchild in the future. To learn more about trusts, read this article from Dummies.com:
Stocks
You can open stock accounts in your name or your grandchild’s name. You’ll need their personal information, so you’ll have to work with their parents to do it. But most parents aren’t going to complain about you buying stocks for your grandkids. You or the parents will act as custodian while the child is under age, but when they reach the age of majority the account is turned over to them. This can be a fun thing to do together with older kids and a budget to invest. There are many types of stocks; look at DRIPS for kids:
Your Will
The final way to leave money for your grandchildren is in your will. When your grandchildren are young, you may want to leave a specific person in charge of the custodial account if you die before the grandchildren reach the age of majority. Don’t feel as if you have to leave your kids in charge; you can choose a professional or another party to handle the money until the grandchild is old enough to deal with the responsibility (depending on how much money you have).
Even a regular savings account in your grandchild’s name is a great way to start teaching children about budgets, savings, and of course, compound interest. If they start young, it’ll pay off big time for them.
