How to Buy Stocks for a Child's Future
Buying stocks for a child's future can provide funding for his or her higher education. With the ever-rising cost of a college education, many parents and grandparents have turned to long-term investment strategies similar to what they use for their retirement accounts. Compared with most other savings methods, investing in stocks can eventually generate more money for the child's or grandchild's college education, although stocks come with some risk.
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Instructions
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Decide the type of account that will best suit your given situation. Two types of tax-sheltered accounts can be set up for a child's education, and both let you invest in stocks. One is a Coverdell ESA (education savings account), and the other is a state-sponsored 529 plan. While the Coverdell will allow more flexibility in investment options, the 529 plan allows for more flexibility in contribution limits and transfer options. Both plans can be used for the same child.
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Open a Coverdell account at a local bank or brokerage firm. The Coverdell has a contribution limit of only $2,000 a year but has many more investment options, which include stocks, bonds and mutual funds. The 529 plan is limited to the investment options that the plan offers. A Coverdell's wider investment choices can allow the $2,000 to be invested more aggressively. The Coverdell as well as the 529 permit tax-free withdrawals as long as the funds are used for qualifying education programs.
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Open a 529 plan directly with the plan administrator or a local broker. An advantage of the 529 plan is that a single taxpayer's limit for contributions is $12,000, with a lump sum of $60,000; $24,000 for a married couple, with a lump sum limit of $120,000. Some states set an overall limit of $360,000 from all contributors combined. The 529's drawback is the sometimes narrow scope of investments allowed by the plan's administrator.
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Research thoroughly any mutual funds and stocks you're thinking of buying with funds in either the Coverdell or the 529 account. Look for good returns over time. The same long-term, diversified investing strategy used for a retirement account should apply to a child's education account. A longer period of investing ensures a higher probability of good returns, so start when the child is just a baby.
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