Q: I'm considering investing some money for my grandchildren. What are the best ways to invest for their future?
When my grandparents invested money for me (back in the 1980s), they generally did it by purchasing a U.S. savings bond. While I certainly appreciate my grandparents doing that, times have changed and there are better options available today.
Perhaps the biggest deciding factors are what you want the money to be used for and the current ages of your grandkids.
If you want to invest for their college education, contributing to a 529 savings plan can be a great idea. You can choose to invest your contributions in a variety of investment funds, and the investments will grow on a tax-deferred basis until withdrawn, and if they're used for qualified education expenses, any investment profits will be 100% tax-free. In many states, you'll also get a nice break on your state taxes for contributing to a 529.
When investing in a 529, consider your grandchild's age when deciding on investment funds. If your grandchild is very young and has a decade or more to go until college, you can choose stock-based funds or similarly aggressive options. As they approach college age, it's a good idea to be a little more conservative.
If you don't want to invest specifically for college, you can open a brokerage account for the benefit of your grandchild. These accounts are known as UTMA or UGMA accounts and allow you to maintain control of them until your grandkid reaches a certain age -- generally 18 or 21.
When you invest in a UTMA or UGMA account, I'd generally suggest stocks or stock-based funds, in order to take full advantage of your grandchild's long investment time horizon. I don't have grandchildren yet, but to give you an idea of what I mean, I've invested money for my own young kids in an S&P 500 ETF. This way, they'll get the benefit of the stock market's appreciation over time, without being too reliant on any single company's success.
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