I got a wonderful question this week that should resonate with anyone who has a young child, grandchild, niece, nephew, godchild… you get the idea — a little kid you care about.
Dear Jimmy,
I would like to put some money to work for my granddaughters. One is 5 the other 6 months. What would you recommend? I was going to put it in their names and use their SS#’s.
Thank you for the advice,
Mark
First a quick news flash: Kids are bad with money…
I know that shouldn’t be shocking — kids typically don’t have long-term goals in mind when they get that meager allowance money. I’ll be the first to admit that I was a straight-up financial disaster as a young lad. Most of the money I made mowing lawns went right into baseball cards and candy — neither of which are paying huge dividends these days.
Luckily, I had reasonable, forward-thinking adults like Mark in my life who were looking out for me.
My grandmother bought me savings bonds each year for my birthday, and kept them in a special file. Once they matured, she gave them to me to help me buy my first car.
A great uncle of mine gave me gold and silver coins every year for Christmas — which are now worth far more than when I got them.
My father regularly bought me stock in several companies and when I turned 21 he handed them over to me. I still own them today…
So when my son turned four, I gave him the single most boring gift in the world: a stock certificate. However, I did “spice” the gift up a bit so he wouldn’t be too confused or disappointed (more on that later).
But if you start today with a small amount of capital, it could grow into a million-dollar nest egg by the time your child or grandchild is old enough to really appreciate it. You just have to know which type of account to start with…
No-Brainer Kid’s Investments
Before you bother with the big money strategy I’ll outline below, there are a couple easy steps you can take to shield some of your money from the tax man. There’s no reason to hand over any extra money to Uncle Sam, and by setting up these accounts, you’ll be able to stash some money away tax-free for your little ones…
529 College Plans
This college saving plan has major tax benefits…
529 plans are a way that you can save for your child or grandchild’s education tax-free through several different investment vehicles. You can set them up in a few different ways, but typically the money you put in starts in more aggressive funds while your children are young, and become more and more conservative as they get closer to college age.
The gains you get in these accounts are tax-differed, so once they are used to pay for certain education costs, you will not pay any taxes on the funds you have in the account. You can typically use the funds for tuition, books, school supplies, and even room and board that are required by the college.
Now, if it turns out your child doesn’t want to go to a traditional two- or four-year school, you can actually change the beneficiary.
Roth IRA
If your child is a bit older, and is earning some kind of income — think lawn mowing or babysitting — you can start a Roth IRA in their name. They’ll be able to stash away everything that they make for the year up to $5,500.
Since most kids want to hang on to some of that cash, you can make contributions on their behalf.
Say your child holds onto the Roth IRA for 40 years. If you load $4,000 into the account and have an average return of say 7% a year over that time. The interest will compound — tax-free — and your child will be sitting on a $60,000 nest egg by the time they are ready to retire
They can take the funds out tax-free when they turn 59 1/2.
Now, while these are prudent tax-saving measures, they won’t turn your child into a millionaire. But there is one little-known account that will…
The Gift of Wealth
I mentioned before that I gave my son a stock certificate for his birthday…
Sure, a stock certificate is not as immediately rewarding from the giver’s perspective — there’s no doubt that it’s thrilling to see the joy on a child’s face when you give them a toy — but the kids would be far better served in the long run than if you hadn’t given them a toy that will inevitably find its way to the Good Will donation bin sooner than later.
In short, kids grow out of these possessions fast. But a gift that pays off years from now will bring all the more joy to your children or grandchildren when they want to buy their first car, put a down payment on their first house, or — if they’re really smart — get a head start on a nest egg for their retirement.
Now, I didn’t buy my son’s stock the “normal way.” I started him on a secret, censored stock plan called a $50 Retirement Plan. These plans allow your dividends to compound like they’re on steroids.
So let’s say you want your little one to retire a millionaire. While it may sound crazy, it is actually rather simple, as long as you start one of these plans early.
Check this out…
If you invest $4,000 into one of these special plans around the birth of a child or grandchild and let it ride — meaning you never even contribute another penny to that investment — that $4,000 will compound to around $1 million by the time they turn 65. That is assuming a 9% return — which, with most of these plans, is completely within the realm of possibility.
If you make semi-regular contributions — say as part of their birthday present each year — that number will be far higher. But the earlier you start, the better.
Now, when I started a plan for my son, I didn’t want to see him weep when I presented him with a piece of paper…
So I like to combine the fun of gift giving with the value of investing: I package the gift of stock with something fun and relatable. It’s the best of both worlds. For example, you could…
- Enroll them in the Disney $50 Retirement Plan and give them a Mickey Mouse doll along with the stock certificate.
- Enroll them in Hershey’s $50 Retirement Plan and pair it with a bag of Hershey Kisses.
- Enroll them in Mattel’s $50 Retirement Plan and gift them with a set of Hot Wheels.
There are plenty of combinations. Get creative.
But again, you cannot just start these plans through your broker. You’ll need to do it through a special account.
