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Securing their tomorrow: Best investments for grandchildren

Securing their tomorrow: Best investments for grandchildren
Nemanja Curcic

Some of the greatest legacies grandparents can leave for their loved ones are a kickstart in early adulthood, like covered tuition, or financial stability in the future, such as with an early savings account. While your love is unconditional and unquestionable, an intelligent financial gift will secure a better foundation for your darlings’ lives. This article will explore and help you decide on the best investments for grandchildren.

What are the best investments for grandchildren?

If you are interested in some of the best investments for grandchildren you can easily make right now, we will provide you with several examples your grandkids will appreciate. Well, if not right now, then definitely when they get older. You can decide among the following:

  1. Savings bonds; 
  2. Children’s savings accounts; 
  3. Custodial accounts; 
  4. Covering costs of education; 
  5. Non-monetary or alternative investments. 

Savings bonds

Savings bonds are investments issued by governments that earn interest for several years, typically more than five and up to 30. These assets are considered a safe or low-risk investment as the government usually guarantees them. However, with lower risk comes lower returns.

The downside of bonds is that you can only retrieve them once at least a year has passed, and penalties are incurred on cashing them before five years have passed. Therefore, your grandchildren would get the most of the investment by holding them until maturity, if possible. Underaged children can hold bonds under their own name, making for an excellent entry into the world of investment. 

The U.S. Department of Treasury offers two types of savings bonds:

  • Series EE bonds:  Fixed interest rate, guarantees on doubling in value in 20 years;
  • Series I bonds: Combined fixed rate and a variable rate adjusted to inflation every six months.

Children’s savings accounts

Besides earning money, opening a youth savings account can help you teach your grandchild the basics of investing.

These accounts tend to have lower fees and higher interest rates than common “adult” accounts. As an adult, you can open them jointly with your grandchild, with the level of control the minor can have depending on the bank and age. Typically, both parties can contribute and withdraw money, with some restrictions.

Check with the bank whether the interest gets taxed if a grandparent contributed the money. If taxes are applied, consider opening a tax-free children’s savings account instead. 

Custodial accounts

Custodial accounts can be used to put away money for children for future use. In addition to cash, you can also use them to invest in stocks, mutual funds, ETFs, and other financial instruments. If you, as a grandparent, open the account, you manage it and make the investing decisions through your brokerage platform until the minor reaches legal adulthood. Additionally, you can withdraw funds for expenses that benefit the minor, which makes these assets highly versatile.

There are usually no limits on payments and withdrawals from these accounts, but the downside is that you may need to pay taxes on earnings. Grandparents can also transfer shares as a gift to the grandchild by transferring it from their brokerage account to the kid’s custodial account.

Most prominent banks and brokerages offer custodial accounts. However, the assets held in a custodial account are considered to be owned by the child, which could affect their eligibility for college tuition subsidies and financial aid.

Covering costs of education

Speaking of college tuition, covering education costs also qualifies as one of the best investments for grandchildren.

For example, the 529 plan enables you to save without taxes on earnings if the funds qualify as college and postgraduate education payments. In the U.S., certain states also provide tax deductions or credits for such contributions.

Recommended video: What is a 529 plan?

What is a 529 plan? Source: saving4college YouTube

Education savings plans, the most common type of 529 plan, commonly allow you to pay for tuition, college/postgraduate-related expenses, and certain K-12 private schooling and apprenticeship programs.

If you open the plan, you own and control the funds, even when the beneficiary, your grandchild, matures. Furthermore, you can choose another family member if the grandchild is not eligible for the funds or does not use them. 

The money in your plan is tax-free, and education-related withdrawals are also tax-free. However, if the funds are used for non-education-declared purposes, they are subject to both tax and penalties (up to 10%). 

Alternatives to monetary investments

If you are skeptical about inflation or simply prefer non-monetary investments, you can also consider some of the following options:

  • Real estate property: Leaving your grandchildren with a property like a house, apartment, or land allows them to use it, sell it, rent it, or otherwise benefit from it.
  • Items of value: Similarly, you can leave valuable items like cars, commodities such as gold or silver, rare collections, or artwork.

Setting aside valuable property as investments for grandchildren has many benefits. For example, these assets tend to increase in value over time and can be sold for any reason, from college fees to creating a principal for further investment. 

You can write a will or create a living trust that cannot be legally disputed. A living trust allows you to appoint a trustee who will ensure your assets are distributed how you want them to and manage the money or property until your grandchildren grow old enough to manage them themselves. 

Best investments for grandchildren – the bottom line

When it comes to planning, strategizing, and research, the best investments for grandchildren do not differ greatly from the best investments in general. Design a sound approach and plan before you embark on the investing journey for maximum output and the least risk.

Consider your grandchild’s needs and your financial objective. Be consistent when it comes to contributing, even if the payments are minimal: the interest will compound. Ultimately, if possible, diversify your investments. After all, if you are showing your young ones their way into investing, make sure you have the basics covered yourself.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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