Want to Educate Your Child or Grandchild About Investing?
You have probably given children clothing, games and toys, and most get outgrown, lost or broken rather quickly. Why not give something more lasting?
Like most adults, you probably wish that you’d started investing sooner than you did. So why not help a child avoid that fate? Give your child or grandchild an investment. But before you whip out your checkbook, consider these issues.
- Treat this as an educational opportunity, not merely a financial windfall for the child. The most important part of the gift involves helping the child learn about investing.
- Make sure the investment you pick is appropriate for the child and supports the educational goal.
- Choose the ownership registration that’s right for you and the child.
Assuming the child is old enough to understand, explain to him or her that investments are used to fund goals. Explain the risks and rewards of investing, emphasizing those that pertain to the investment the child has received from you. For help, turn to the educational resources center at www.jumpstart.org. Jump$tart offers materials that can help you teach children about a wide range of financial issues. Click the Clearinghouse button to review resources.
The investment you should select depends on how long you want the money to remain invested. If you want a young child to use the money for a bicycle in a year or so, a bank savings account is appropriate. If the money will be used for a car, college, house or other need that’s 10 years away, an investment in shares of a stock or a mutual fund might be appropriate. If you choose the stock route, you might consider selecting shares of a company that appeals to the child -- say, a company known for its theme-parks or toys for a young child, or a music or clothing company for a teenager. The goal is to pick a company that would be of interest to the child.
Remember that children under 18 cannot own investments. So, consider some of the options available to you:
- Open a custodial account based on the Uniform Transfer to Minors Act. You’d name yourself or another adult as the custodian; the child is named as the beneficiary. I suggest you have the statements mailed to the child’s address, so he or she can see how the account performs during the year.
- Establish a Coverdell Education Savings Account in the name of your minor. You can contribute up to $2,000 a year (as long as your income is below certain limits). Your child, who will take control of the account between ages 18 and 21 depending upon your state of residency, needs to spend the funds for education by age 30 or taxes and penalties could apply.
- Create an account in a Section 529 College Savings Plan. Contributions can be as little as $25 and as much as six figures. The child never gains control over the funds.
(For more complete information, including a description of fees, expenses and risks, you should review the plan offering statement carefully.)
With ongoing education as part of your gift, even a small amount can lead to a lifelong habit of saving and investing -- and that could be one of the best gifts anyone ever received.