A Grandparent’s Guide to Investing for Grandchildren

As a grandparent, you’ve likely thought of spoiling your grandkids as a way to show your love. The most common way to do this is by giving gifts like toys. But in this economy, financial security is one of the best gifts, and you can do this by investing for grandchildren. With this, you can give them a financial head start.

Here are the best ways to start saving for grandchildren and picking the right investments to grow with them.

Why Invest for Your Grandchildren?

Let’s be real—kids grow up fast, and so do their expenses. Saving for grandchildren is a great way to prepare for their future, and the earlier you start, the more time your investments have to grow. Plus, more than the financial benefits, starting investments for grandchildren teaches them the value of money and good financial habits, which can help them avoid the “too much month at the end of the money” dilemma down the road. 

What is compound interest?

Compound interest is one of the best things to ever happen to investments. While simple interest is calculated only on the principal, compound interest is calculated on both the initial principal and the accumulated interest from previous periods. This means that even small investments for grandchildren can grow exponentially because the interest also earns interest over time. 

Say you invest $1,000 with an annual interest rate of 5% when your grandchild is born. Thanks to compound interest, you’ll earn $50 in interest after one year, and in the second year, it will be calculated at $1,050. By the time your grandchild goes to college, it will have grown into a nice chunk of change–it’s like giving them a gift that just keeps getting bigger. 

Best Ways to Save for Grandchildren

If you’ve finally decided on saving for grandchildren, the next question is, “How?” There are several great options, such as traditional savings accounts and investment plans that grow over time. Choosing one that works best for your financial goals and their future needs is key. Here are some of the best ways to save for grandchildren:

529 College Savings Plans

If you want your grandkids to graduate with more than just student debt and something on the positive side, this is your best bet. It’s a tax-advantaged plan for your grandchildren’s education expenses. This includes their tuition, books, housing, and more. The best part is that your contributions can grow tax-free, and withdrawals for qualified education expenses are also tax-free.

Many states even offer tax deductions for contributions. And another plus? This is one of the more flexible investments for grandchildren available. If your grandchild skips college, you can transfer the funds to another family member or use it for other educational programs. 

Custodial Accounts (UGMA/UTMA)

The Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account is an excellent option for the more general savings route, not just education. These accounts let you set aside assets like cash and stocks for your grandchild’s future needs. They’re great for saving for grandchildren because they can be used for anything that benefits them, not just education.

The tricky part is they get full control once they turn 18 or 21, depending on your state. If you’re going with this option, make sure you teach your grandchildren how to manage their finances properly so they don’t blow your investments on impulse. 

Roth IRAs for Minors

A Roth IRA is a retirement account allowing post-tax contributions. If your grandchild has any earned income like from summer jobs, you can start a Roth IRA for them. It’s one of the smartest long-term investments for grandchildren because their money grows tax-free and can be withdrawn tax-free in retirement. They can also tap into the account penalty-free for education expenses. 

Trust Funds

A trust fund is a legal entity that can hold money or assets for your grandkids. This is a flexible way of investing for grandchildren, allowing you to set rules on how and when they can gain access to the funds that you’ve worked hard to save for them. This kind of control helps you ensure that the money is managed responsibly. 

Stocks

If you have plenty of free time, the stock market is also one of the most rewarding investments for grandchildren. Stocks offer higher returns, though they come with a bit more risk. If hand-picking stocks isn’t your thing, consider index funds or mutual funds to spread out the risk while keeping the growth potential. 

Savings Bonds

Savings bonds are a low-risk investment issued by the government. Essentially, you loan money to the government in exchange for a fixed interest rate. Because the government issues them, they’re one of the safest ways to save for your grandchildren because you can be sure you won’t lose your principal investment. Plus, the interest you earn on savings bonds is also exempt from state and local taxes, and you can even defer federal taxes until these are cashed out. If you use the funds for education, the interest may also be tax-free. 

Tips for Effectively Saving for Grandchildren

Tip #1: Start Early to Maximize Growth

Thanks to compound interest, the earlier you begin saving, the better. It works its magic by growing even small contributions into something significant over time. If you’re thinking about the best way you can effectively prepare for your grandchildren’s future, there is no better time to save than now.

Tip #2: Build a Balanced Portfolio for Your Grandchildren

When it comes to investing for grandchildren, diversification is critical. A mix of stocks, bonds, and other assets will keep their portfolio balanced and ensure consistent growth over time. 

Tip #3: Leverage Gift Tax Exemptions

As of 2024, you can give up to $17,000 per year to one grandchild without worrying about tax penalties. Over time, these gifts can grow significantly in accounts like 529 plans, custodial accounts, or Roth IRAs.

Investing for Grandchildren Pays Off

Investing for grandchildren isn’t merely about money. Rather, it’s about setting them up for a future where they’re financially secure. More importantly, saving for grandchildren also teaches them valuable lessons on financial literacy that will serve them for life. So whether you go with a 529 plan, a custodial account, or a combination of different methods, the time to start is now. 

Related Articles on Dividend Power

• What is Unearned Income? Understand How It Works
• 8 Tax Saving Moves Before Year End