What Is the Best Way to Invest $1,000 for a Child?
When it comes to saving for your child's future, there are a few options available.
Contributing Writer at Tally
March 9, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
If you have a young child, you may already be thinking about the best way to set them up for their future. Should you put money in a college fund? Do you invest it in the stock market? Or do you consider something like a high-yield savings account?
Let’s outline the best way to invest $1,000 for a child, so you can gather all the information you need to start setting your little one up for future success.
The best way to invest $1,000 for a child
When it comes to saving for your child's future, there are a few options for you to choose from. The one that’s right for you depends on your personal financial situation.
As a disclaimer, before you start opening accounts, you may want to speak with a financial advisor to ensure you're choosing the plan that's right for you and your family. An advisor can also help with your investment strategy and determine which account type is best.
That being said, below are a few options you can consider if you're in search of the best way to invest $1,000 for a child.
A custodial account is an account often set up at a bank or investment firm. Though you, as the adult, are the one responsible for opening the account, your child is technically the legal holder of the assets in the account.
You and your child can work together to invest in various investment options, such as:
Exchange-traded funds (ETFs)
Not only will a custodial account allow you to start saving money on your child's behalf, but it can also provide your child with financial literacy, which may increase the likelihood of future financial success.
There’s also a significant income tax benefit that comes with custodial accounts. The first $1,100 in earnings from the account is not taxable (as of the 2021 tax year). “Earnings” from the account — otherwise known was unearned income — includes things like interest and dividends. This benefit allows at least some of the money to grow tax-free.
There are two types of custodial accounts:
The Uniform Transfer to Minors Act (UTMA)
The Uniform Gift to Minors Act (UGMA)
Once your child reaches the age of majority in your state — usually between 18 and 25 — they will take over control of the account.
529 college savings plans
A 529 plan is a type of savings account used explicitly for future education expenses. You may see 529 plans also referred to as qualified tuition plans. There are no income limits for plan contributions.
Additionally, anyone can contribute to a 529 plan. This means that family and friends can put money into the 529 plan as a gift. A 529 also offers tax advantages, as long as the funds are used explicitly for qualified education costs. If the funds in the account are used for qualified education costs, then capital gains from the investments are not subject to federal income taxes.
If your child does not attend college, trade or vocational school, you can transfer the 529 account to another child or family member. If you have multiple children, a 529 plan could be a very attractive option.
If you don’t want your child's future to be tied up in an education-specific fund, you may want to consider another option, like a Roth IRA. A Roth IRA can help you start establishing retirement savings for your child. The money in this individual retirement account, along with any interest-related earnings, grows tax-free.
That said, there may be penalties associated with Roth IRA withdrawals. Withdrawals occur without tax penalties only when your child reaches 59.5 years old.
Additionally, your child can only contribute to a Roth IRA if they’ve earned income for the year, so it may not be the best option if your child is younger and you’re looking to get a head start on their investment portfolio.
What you need to have in place before you start saving for your child
It's fantastic if figuring out the best way to invest $1,000 for a child is one of your financial goals. It shows that you care about your child's future and are prioritizing saving money.
When you consider that 53% of Americans reported to CNBC and Acorns they hadn't opened any accounts for their kids, saving $1,000 could put you in a better spot than the average American.
Before you start saving for your child's future, there are three main things to have in place.
1. Pay down existing debt
First, it’s wise to ensure you've paid down your existing credit card debt. Credit card debt tends to come with compound interest rates, which can make paying it off a challenge.
There are a few different strategies you can use to pay down your existing debt, including:
2. Have a budget in place
Once you pay off your debt, you may want to consider creating a budget to monitor future expenses. Eventually, you can build your child's savings and investment plan into your budget. If you continue to use your credit cards, try to pay off your balance in full by the due date. To do this, ensure you’re not spending more on your credit card than your budget allows by treating your credit card more like a debit card.
3. Set up a savings fund
Finally, it’s smart to set up a rainy day or emergency fund. A rainy day or emergency fund can potentially prevent you from having to take on debt to cover an unexpected expense. Knowing you can cover unexpected expenses can offer more flexibility so that you can focus on other financial goals, like investing on your child’s behalf.
Manage your personal finances and start saving for your child today
Whether you have a newborn, toddler or teenager, you may be looking for the best way to invest $1,000 for your child. The answer ultimately depends on your personal financial situation, as there are a few options available. A financial advisor can help you figure out which option suits both your current situation and future goals.
Saving for your child's future is great, but it shouldn’t come at the expense of your current quality of life. Before you start stashing money away on your child's behalf, you may want to focus on paying down your existing credit card debt, budgeting and setting up an emergency fund. Once these protective measures are in place, you can start investing and saving for your child's future.
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