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Ask a Fool: What's the Best Way to Invest for a Child?

By Matthew Frankel, CFP® – Jun 28, 2019 at 6:00AM

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If you want to set aside money for a minor, there are a few ways to do it.

Q: I want to start setting aside some money for my children, but instead of just sticking it in a savings account, I'd like to invest it on their behalf. What's the best way to do that?

Investing is certainly better than just saving money for a child. However, the best way to do it depends on your goals for the money as well as your (and the child's) particular situation.

There are three main options when it comes to investing money for the future benefit of a child.

First, if your goal is to help the child pay for college expenses, a 529 savings plan could be the smartest way to go. These education-specific savings accounts allow you to invest in a variety of options, and eventual withdrawals used for qualified education expenses are tax-free. Plus, depending on where you live, you can get a nice break on your state taxes for your contributions.

Second, if the child in question has income of their own, a Roth IRA could be a good idea. This way, you can invest in virtually any stock, bond, or fund you want. Plus, despite the retirement-oriented nature of these accounts, there's an exception if withdrawals are used for college. In other words, a Roth IRA gives the child the ability to use their investment account for college without requiring them to do so.

The downside is that aside from using funds for college or a first-time home purchase, withdrawals from a Roth IRA are generally age-restricted, although the original contributions can be withdrawn at any time.

Third, if you don't want to invest for any specific purpose, consider a UGMA (Uniform Gift to Minors Account) or UTMA (Uniform Transfer to Minors Account), collectively known as custodial brokerage accounts. These work like standard brokerage accounts, except that you'll have control over the account until the child reaches a certain age -- typically 18 or 21. These are similar to trust funds, but without the legal complexity.

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