Although most parents are financially savvy enough to save for their retirement, saving for their children sometimes takes the back burner. With limited cash on hand and the feeling that the children will be young forever, most put off building a substantial investment portfolio for their child. But with government incentives and expert advice, there are some great options to help you save for your child. Follow these five steps to get on the right track.
Start a 529 College Savings Plan. Most states have a state-sponsored college savings plan you can contribute to each month. The money is invested and grows tax-free provided that you use the money for educational purposes. Not only can you contribute a portion of each paycheck to a 529 plan, but family members can contribute as well. And for anyone who contributes, the money can be written off on your taxes each year. For more information on 529 plans, check out Bankrate.com or path2college529 (see Resources for links).
Start a Roth IRA for your child. There is no age requirement to set up a Roth IRA, so your child will be eligible for this great tax savings. As long as your child has a job, even if only a part-time after-school minimum wage job, he or she will qualify for this investment form. Even if your child does not have an after-school job, online investment advice such as that seen on fairmark.com, claims that allowances for household chores can be considered “payment” and make the child eligible for a Roth IRA (see Resources for link).
Invest in mutual funds. When investing for your child’s future, keep a moderate portfolio in terms of risk. Investing in T-bills will not yield the type of return that would best benefit your child, but you do not want to lose your child’s future in the stock market. Mutual funds are a great way to build your child’s investment portfolio in a way that will truly grow the income while keeping the risk moderate.
Speak to an investment adviser. Personal investment advisers can sit with you at length to look at your child’s investment portfolio. With comprehensive training and experience, he or she can give you pointers on how to grow your child’s portfolio without exposing it to too much risk. For advice in making sure your investment adviser is top rate, look at SEC guidelines on the topic (see Resources for link).
Put in cash. Use direct deposit to withdraw a small portion of each paycheck automatically for deposit in your child’s investment portfolio. As a teaching tool, you can also have your child do the same and save a portion of his own allowance or part-time job salary for investments. Use the opportunity as a tool to teach your child how to save money and how to follow stocks or interest rates. Together, this can be a fun bonding activity in addition to a smart way to provide for your child’s future.