Thursday, October 1, 2009, PM | 1 Comment
Sometimes, for a variety of reasons, grandparents are closer to their grand kids more than the kids’ parents. For the grandparents it’s important to pass on the values and traditions of being financially responsible and to make sure kids understand those values.
For instance, they have contributed to the savings accounts of their grandchildren, bought them certificates of deposit that earn interest for a fixed term, and invested in mutual funds on their behalf.
The grandparents give the kids cash sometimes and they enjoy that but it’s best to invest for them for the long term. Parents and grandparents can choose from a number of advantageous options:
Stocks have taken huge beating for over a year so lots of folks are hesitant to invest in them for their kids. That’s understandable. But still some finance experts argue you want to have investments that outpace inflation over time, and, historically, stocks have outpaced inflation. That’s particularly important because college tuition usually outpaces inflation, too.
Over the long term, stocks have outperformed other investments, including many kinds of bonds. Think about purchasing stock in companies kids recognize. Companies with direct stock purchase plans allow you to purchase shares directly and generally with reduced fees. Even better: if possible, transfer shares you already own that have appreciated. The strategy allows you to avoid being taxed on the capital gains, and if the stocks are sold, the child will generally be in a lower tax bracket.
One way to potentially reduce the risks of buying an individual stock is to purchase stock mutual funds, which invest in many stocks and are professionally managed. Be aware that a fund’s fees and expenses can eat away at gains. You can find low-cost mutual funds through free online fund screeners, such as those offered by Yahoo! Finance, The Wall Street Journal, and CNNMoney.com.
Savings Bonds and Municipal Bonds
Series I Savings Bonds and Series EE Savings Bonds are easy to buy in a bank, through payroll deductions, or online at Treasury Direct are safe investments because they are backed by the government and designed to never lose value.
529 College Savings Plans
Section 529 of the Internal Revenue Code authorizes tax-advantaged savings plans to pay for college expenses. These 529 plans generally consist of mutual funds and may allow contributions of $50 or less, depending on the plan chosen. Each state has different plans, and out-of-state residents can usually purchase any state’s plan. You can compare 529 plans at College Savings or Saving for College.
In a Nutshell
Although minors can own savings bonds, adults need to set up custodial accounts for other kinds of bonds and assets, such as stocks and mutual funds. With Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts, the gifts are irrevocable and the minor gains control of them upon reaching a designated age. Maybe your loved one will use the money in ways you support, but maybe not. It’s a prospect worth considering.
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- Dec 31, 2009: TrainyBrainy » Blog Archive » Posts about Best Gift for a Child as of December 31, 2009