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Investing for Kiddos

wealth Jun 03, 2022

If you're considering investing for your kids, check out this video to learn about the options you have in terms of account types.

Investing when your child is young can be extremely powerful, because it allows time to work magic in terms of compounding the money. Let's look at an example. Assuming you invest $3,000 for your child at birth in a custodial Roth IRA (this would assume your infant is doing some baby modeling and has an earned income to report!) and that money is allowed to sit until 65, your child winds up with almost HALF A MILLION dollars of tax free money*! Those numbers assume you never invest again for the child outside of the initial $3,000. Talk about building generational wealth.

Paying for a kiddo to attend college will also require investing - trying to save your way there would be incredibly difficult. If you're not sure how much college is expected to cost in the future, use this free online calculator to help you figure it out. Have a talk with your partner about if you plan to cover all, part, or none of the anticipated college expenses. As your child ages, I would include them in this discussion as well. You cannot start early enough here.  

We used a 529 hack to start saving for our daughter's college before she was even conceived! We started the account in my name (because you need a social security number to open the account), and then transferred the beneficiary to our daughter after she was born. We were able to take advantage of the Indiana tax credit for extra years by doing so, and got a jump start to funding college. Remember, time is your friend here.

Knowing what type of investments to buy within these accounts is an entirely different story - click here to learn more about how to actually invest and evaluate funds. 

So which account is best? We use a combination of all three. Our plan is to have the bulk of total investments in a 529, with the Custodial Roth IRA being the next largest account, and UTMA being the smallest. This isn't the best plan for every family, but it is what we have decided will work best for us. 

I personally LOVE the built in guardrails of a custodial Roth IRA, so outside of funding education it is my favorite account. Money without mentorship is a disaster, but even WITH mentorship the frontal lobe isn't fully developed until 25 😉. Those IRS restrictions of using the account for retirement, educational expenses, first home (with limits), and medical expenses (with limits) means the money is likely being used for something I'm definitely comfortable with.

Remember, investing for your kids HAS to come after securing your own retirement. The best gift you can give your children is becoming financial secure yourself, so you will never be a financial burden to them. A rough estimate of your goal nest egg is 25 x your annual expenses. Another quick and dirty rule is to simply invest 18-20% of your gross income for your own individual retirement. If you're not there yet, no worries. Just make funding your retirement your #1 goal right now and put a hold on investing for kids. 

If you're looking for help navigating how to balance debt, savings, AND investing (plus the know-how to invest well), join the waitlist for Money Boot Camp for White Coats. It's currently full, but definitely worth the wait!

*Assumes average return 8%

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