Invest Wisely For Your Grandchild's Future: A Guide

Investing in your grandchildren's future is a great way to ensure their financial security and help them get a head start in life. There are several options for those looking to save and invest for their grandchildren, each with its own benefits and considerations. Here are some of the most popular methods:

- Custodial Accounts: Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts allow you to put money or assets in trust for a minor grandchild. These accounts can be opened at most large banks and brokerages, and the funds can be used for any purpose once the grandchild reaches adulthood.

- 529 Plans: These are tax-advantaged education savings plans that can be used for college, K-12 tuition, apprenticeship programs, and student loan repayments. While contributions are made after-tax, the money grows tax-free, and withdrawals for qualified expenses are also tax-free.

- Savings Bonds: US savings bonds are low-risk investments that earn interest for up to 30 years and are guaranteed to double in value in 20 years. Minors can hold savings bonds in their own names, making them a great way to introduce grandchildren to investing.

- Junior ISAs: These are tax-free savings accounts available in the UK. Anyone can contribute up to an annual limit, and the money can be invested in the stock market or held in a cash ISA. Junior ISAs are a good option for long-term savings as they offer a better chance of outpacing inflation.

- Certificates of Deposit (CDs): CDs offer a guaranteed rate of return over a specific period and can be a good option for short-term savings goals. However, early withdrawal usually incurs a penalty.

- Mutual Funds: Mutual funds provide low-cost portfolio diversity and are typically available in 529 plans and custodial accounts. They hold a combination of stocks and bonds, providing a balanced investment option.

- Coverdell Education Savings Accounts (ESAs): Similar to 529 plans, Coverdell ESAs allow tax-free investment growth for qualified education expenses. However, contributions are limited, and the funds must be used before the grandchild turns 18.

Custodial accounts

With a custodial account, you can explain that the money belongs to the child and that you, as the custodian, are saving and investing for them until they reach adulthood. By showing a child the investment mix, types of assets, and performance reports, you can educate them about investing until the account becomes theirs.

The money in the account belongs to the child, with the adult acting as custodian until the child reaches a certain age (between 18 and 25, depending on the state), at which point the assets must be transferred to the child. Until the account is transferred, the custodian controls all investment decisions but may not change the child the account was established for. Withdrawals can be made at any time by the custodian, but they must be for the benefit of the child.

529 college savings plans

The money in a 529 plan grows tax-free and withdrawals for qualified education expenses are also tax-free. If the funds are used for non-educational expenses, however, they will be subject to tax and a 10% penalty. 529 plans can be used to pay for a wide range of college expenses at accredited schools nationwide, in addition to tuition expenses for K-12, certain apprenticeship costs, and student loan repayments.

There are two types of 529 plans: 529 tax advantage and 529 prepaid plans. The 529 tax advantage plan is the most popular option and has strong tax advantages. Your investments grow tax-free, and you can also withdraw funds tax-free for education expenses, such as tuition, room and board, and assigned textbooks. You can use withdrawals from education savings plan accounts at any college or university, and some trade schools. You can also use your education savings plan to pay up to $10,000 per year, per beneficiary, for tuition at any public, private, or religious elementary or secondary school.

Every state except Wyoming offers a 529 college savings plan. You can invest in any 529 plan from any state, but you should check if the plan offers any additional in-state benefits for the state where you or your beneficiary resides. You can use plan assets at any eligible school (one accredited for financial aid) in the country and abroad. That includes K-12, two- and four-year colleges, graduate schools (including law and medical), and vocational and technical schools.

There are no income limitations for a 529 plan. Through "accelerated gifting," an account owner can apply up to five years of annual gift tax exclusion from a single lump sum contribution in a single year without incurring a gift tax. However, contribution funding limits vary and are established by each plan.

If your child doesn't go to college, you won't lose the money in your 529 plan. You can name another eligible family member as a beneficiary (subject to plan rules), use the funds for your qualified education expenses, or take a non-qualified withdrawal. A non-qualified withdrawal is subject to a 10% federal penalty and applicable federal, state, and local income tax.

Anyone of any age can use a 529 plan to save for education. You can even be your own account beneficiary. If your chosen school is eligible, you can use 529 assets to pay for education expenses, even if you're not attending full-time.

Certificates of deposit

To open a CD for a grandchild, you would need to visit a bank and fill out a form. You would list the grandchild as the owner of the CD and yourself as the account custodian. You will need both your Social Security number and that of the child. You would then deposit the money with the bank, ensuring that the minor understands that the money is not accessible until the CD reaches maturity.

CDs may be an appropriate choice if you want to save long-term for your grandchildren. The longer the term of the CD, the higher the interest rate the bank tends to pay. If you anticipate needing to withdraw funds periodically, you can use a CD laddering strategy, which involves using multiple CDs with staggered maturity dates to take advantage of long-term rates while still having access to some of the funds.

CDs are protected by the Federal Deposit Insurance Corporation (FDIC) up to the specified limit.

Junior ISAs

The annual limit for Junior ISAs in the 2024/25 tax year is £9,000. Parents or guardians with parental responsibility can open a Junior ISA, but the money belongs to the child. The child can take control of the account at 16 but cannot withdraw the money until they turn 18, at which point the account is rolled over into an adult ISA.

It is important to note that anyone can add to a Junior ISA, but only parents or guardians can open one for a child under 16.

Coverdell Education Savings Accounts

A Coverdell Education Savings Account (ESA) is a trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries. The beneficiary must be under the age of 18 when the account is established, although there is no requirement for them to be your child or have any particular relationship with you. The age restriction may be waived for special needs beneficiaries.

Coverdell ESAs offer tax-free investment growth and withdrawals when funds are spent on qualified education expenses. This includes elementary and secondary education expenses such as books, supplies, equipment, academic tutoring, and special needs services. The funds can also be used for higher education expenses.

There is a maximum contribution limit of $2,000 per year for any single beneficiary, and the accounts are only available to families below a specified income level. For single taxpayers, the modified adjusted gross income (AGI) must be $95,000 or $110,000 or below, depending on the source. For married taxpayers, the AGI must be $190,000 or $220,000 or below.

Coverdell ESA funds must be used by the time the beneficiary turns 30. If the funds are not used, the beneficiary will receive the amount, but it will be taxed. If the beneficiary dies before turning 30, the funds must be distributed within 30 days.

Coverdell ESAs are similar to 529 plans but differ in that Coverdell funds can be used for other school expenses besides tuition for elementary and secondary school. Additionally, Coverdell ESAs allow you to self-direct investments, whereas 529 plans only allow you to select from a predetermined menu of investment options.

Frequently asked questions