- 1 Investments for Grandchildren
- 2 Where to Open Investment and Bank Accounts for Grandchildren
- 3 Other Assets to Give Your Grandkids
- 4 How to Gift Stock
- 5 Investing for a Grandchild: Saving for Their Future
4. Coverdell Education Savings Account
Coverdell Education Savings Accounts are a type of investment account which make it easier to pay education expenses for your grandchildren.
Much like 529 plans above, Coverdell ESAs have money grown tax-free at the federal level (most states allow this as well) if used for qualifying education expenses.
These accounts also allow for funds to go toward qualified education expenses of K-12 grade schooling in addition to college costs. If used for nonqualified expenses, you will incur a 10% penalty as well as tax on any gains recognized in the account at the time of sale.
You cannot deduct Coverdell contributions and you must make them before your grandchildren reach the age of 18 (or later if they qualify as a special needs beneficiary by the Internal Revenue Service).
You can set up more than one ESA for a single beneficiary, but like IRAs, the maximum contribution applies across these multiple accounts (not per account) and is limited to $2,000 per year.
Investments for Grandchildren
You can use UGMA or UTMA accounts to hold many different types of assets. Commonly, you can open a custodial brokerage account to begin investing on behalf of the child.
You can use this as an opportunity to teach your grandkids about investing, the importance of thrift, or general money management skills. To get them interested in investing, consider creating a portfolio of stocks for kids, with companies they’ll likely recognize from their daily lives.
Companies could include Apple, Google, Tesla, McDonald’s, Disney and many more. With a strong portfolio of blue chip stocks, your grandkid’s account balance could grow steadily and consistently across multiple years.
Be mindful that these accounts do carry some tax breaks related to investment income but must still pay above certain levels due to the Kiddie Tax.
This tax requires parents to pay the marginal income tax rate on all unearned income realized in the account. This rule applies to all unearned income for kids under 19 or full-time students under 23.
This doesn’t make the child pay higher taxes than their current wages. The IRS allows the first $1,100 of unearned income to be tax-free, the second $1,100 to be taxed at the child’s rate and then any balance above that at the parents’ rate.
This means that if you put $1,000 into a Greenlight UTMA/UGMA Investing account each year for your grandchild and they earn under $1,100 in dividends, it’s tax free. However, if it’s $1,700, there will be taxes due on $600 of that amount.
If the account has $2,500 in dividends, $1,100 will be untaxed, $1,100 will be at the child’s tax rate and $300 at the parents’ rate.
If your grandchild later sells any stocks held in their account, they will be subject to capital gains tax. Though, if held for longer than a year, they may qualify for slight tax breaks by having the gains fall subject to long-term capital gains tax and not short-term capital gains tax.
The former tends to have more favorable rates while the latter incurs the same rates as you pay on ordinary income.
2. Exchange-Traded Funds (ETFs)
Exchange traded funds (ETF) have become increasingly popular over the last two decades. These act like mutual funds by holding an underlying, diversified portfolio of stocks, bonds, or other investments but trade openly on the stock market exchanges.
Because of this feature, they often have better liquidity than mutual funds because they trade throughout the day.
ETFs can represent both passive and active investment options. Passive ETFs tend to be index funds which track a broader market index but also a specific sector or group of related assets.
Investing in index funds provides instant diversification in one investment with low expenses. You don’t take on unnecessary risk from actively picking stocks or attempting to beat the market.
Because they attempt to replicate the performance of a public benchmark or sector, management expenses are negligible and mostly come down to the stock trading commissions you might face if not using a free stock trading app to invest.
Active ETFs can charge much higher management fees because they actively trade in and out of securities to achieve some stated investment objective.
ETFs can pay dividends, an excellent passive income idea to consider for building an income portfolio. They can also act as high-return investments over time.
3. Mutual Funds
Mutual funds allow you to pool your money with that of other investors, which creates a larger collection of stocks, bonds and other investments. This is often referred to as a portfolio.
When a mutual fund’s securities’ values change, the net asset value (NAV) is adjusted accordingly by calculating how much more—or less—the fund would have to sell its investments for in order to fulfill shareholder redemptions.
This price changes based on the value of the securities in your portfolio at the end of each market trading day.
Mutual fund investors don’t actually own the underlying securities, just the mutual fund shares themselves.
Mutual funds come in two types: passively managed and actively managed mutual funds.
In the case of active mutual funds, a portfolio manager or team of managers decides which investments to buy and sell.
The primary goal of portfolio management is to outperform a comparable benchmark, justifying using their investment vehicle instead of simply investing in an index fund.
Passively managed mutual funds simply attempt to recreate the performance of a benchmark like a stock index.
You can invest in mutual funds through IRAs for your grandchildren and allow them to reap the long-term rewards of compounding returns in a diversified investment.
4. Savings Account
Starting to save can seem daunting, but parents and grandparents can address that head on by making it an easy task for kids through repetition and understanding.
If you’ve already conquered the ability to save, be that family member who helps your grand kids learn about the importance of opening a savings account early and developing good money habits as early as possible.
If you want to help your grandchildren build a savings account balance or even help them open an account through a banking app for minors to handle money from their allowance or a part-time job, you’ve got options to make building savings a habit.
Doing so will provide them with an opportunity to earn some interest on their savings account, while also learning how to bank. Teen checking accounts even come with debit cards for kids and teens that allow parents to monitor spending and set guardrails for how they spend.
When choosing a youth savings account, you’ll want to pay attention to the following items:
- interest rate
- any fees or minimum balance requirements
- how the grandchild can access the funds
- how the account can grow with them as they mature.
Where to Open Investment and Bank Accounts for Grandchildren
Now that you know more about the types of investment accounts available for you to open on behalf of your grandchildren, you might want to consider which investment options to pick.
Thankfully, there are many all-in-one money apps for kids, allowing your grandkids to start saving, learn about spending and also how to invest money for the first time.
M1 Finance ($30 bonus) – Best for Custodial IRAs
- Available: Sign up here
- Price: Free trades, $125 subscription to M1 Plus required for custodial account
M1 Finance is an all-in-one personal finance solution that allows new investors to set up an account in seconds.
If you want to use this as a kids investing app, you’ll need to apply for an M1 Plus subscription. The online discount broker has a limited time offer of the first year for free ($125 value).
The service offers investors the ability to create Portfolio Pies, or a diversified portfolio that rebalances to help you achieve your money goals.
M1 Finance is a service designed for self-directed investors by offering flexible, customizable and automated financial solutions. The platform manages your money intelligently based on how you want.
Consider signing up for an M1 Finance custodial account or custodial IRA today.
- Available: Sign up here
- Price: Free 1-month trial, $7.98/mo after for Greenlight + Invest
Greenlight + Invest is an investment account for kids that comes paired with a debit card.
It’s easy to use and can double as a savings account and banking apps for teens. The app will teach the basics of investing, how to invest in stocks and ETFs, etc.
It works best if parents and/or grandparents are involved in the process because it requires linked accounts from the custodians’ banks or brokerages.
The all-in-one plan teaches them important financial skills like money management and investing fundamentals — with real money, real stocks and real-life lessons.
You can use the investing feature to:
- Buy fractional shares of companies your kids admire (kid-friendly stocks)
- Start investing with as little as $1 in your account (with fractional shares)
- No trading commissions beyond the monthly subscription fee
- Parents approve every trade directly in the app on individual stocks and ETFs with a market capitalization of $1 billion+
Consider opening a Greenlight Card + Invest account to start investing in a custodial brokerage account for your kids today. The first month is free to trial the product and see if it meets your needs for giving one of the best investments for grandkids.
Read more in our Greenlight Card review.
Related: Greenlight Card Alternatives: Best Debit Cards for Kids Options to Consider
Acorns Early ($10 Bonus)
- Available: Sign up here
- Price: Acorns Personal: $3/mo and Acorns Family: $5/mo
Acorns offers a custodial brokerage account for parents and grandparents interested in opening an investment account for their family called Acorns Early.
Acorns Early offers investment portfolios of various risk levels for kids, so you can feel confident in the account you’re opening up for your little one. This app can be a great way to teach minors how to invest money.
The best part about Acorns is that it doesn’t require any minimum deposit to get started and allows you to contribute money on a regular basis.
One of the best ways to start saving for your grandchild is through a savings and investing account product like Acorns Early.
Learn more in our Acorns review.
Related: Best Acorns Alternatives: Micro-Investing Apps to Use
Other Assets to Give Your Grandkids
1. Savings Bonds
When my grandparents invested for me in the 1990s, they did so by purchasing savings bonds in my name. My parents followed suit and used these to set aside money for me to pay for the costs of college.
Once I reached college age, I had worked hard enough to earn scholarships and financial assistance to pay for private college without need for this savings.
The college costs I encountered thankfully made the college savings they had accumulated for me unnecessary, allowing me instead to cash out these bonds and begin investing in the stock market as a teenager.
But for grandparents who want to save money for their grandkids with these zero risk financial products, you can still do so directly through TreasuryDirect.gov.
You will no longer receive physical bond certificates to hold but can still cash them at a financial institution if you have some unredeemed savings bonds for a beneficiary.
These savings bonds grow tax free from state or local taxes, but you must still pay federal taxes on them when redeemed.
Rates on these bonds have fallen dramatically in the last decade but if you can manage to hold on to them for at least 20 years, the Treasury guarantees to double the original amount paid as a minimum level of return.
Consider investing in savings bonds if you plan to start at least 20 years in advance and want a riskless investment. Otherwise, you’ve got better options listed above for growing an investment portfolio your grandchildren can use to their advantage.
The annual exclusion refers to $15,000 in gifts you can give to as many people as you want annually.
Married couples can combine their annual exclusions to give up to $30,000 ($15,000 x 2) to as many individuals as they like per year–tax-free.
As a grandparent, you can provide a financial gift for a child up to the annual exclusion each year without paying taxes. These gifts can help to pay for college or other higher education costs.
If you make financial gifts in excess of the annual exclusion, they count against the lifetime exemption from estate taxes, which comes to $11.7 million per individual and $23.4 million per couple in 2021.
If you have concerns about the lifetime exemption as a grandparent, you can help your grandchild pay for college while limiting your own tax liability.
You can do this by making a payment directly to their public college, private school or any other type of higher-education institution.
If grandparents pay educational expenses directly to the school, these costs do not count toward the annual exclusion.
This can protect against exceeding the annual exclusion and lifetime exemption while still paying for college tuition and other college expenses charged by the school.
Paying for the beneficiary’s college costs like this provides tax advantages as well as potentially lowering the possibility of coming into contact with the federal gift tax or estate taxes.
As an example, even if you send $25,000 a year to your grandchild’s college, the amount over the annual exclusion of $15,000 ($10,000 in this instance) would not count against the lifetime exemption.
How to Gift Stock
You can gift stock directly without needing to sell before gifting the shares to your grandchildren. If you want to invest for your grandchildren, a variety of options exist.
However, transferring stocks from your account to theirs involves some additional steps that may not be obvious beforehand.
When you sell stocks for more than your cost basis, you are liable for capital gains taxes. If you transfer appreciated stock, you nor the recipient will encounter capital gains. Your basis and holding period transfer with the stock position.
Next, you’ll also need to understand a bit about gift tax rules. For most individuals, this won’t pose a problem so long as the annual amount of gifted stock falls below $15,000 per person (or $30,000 per married couple filing jointly).
Finally, you’ll also want to consider how to maintain control over these positions. Giving stocks as a gift means relinquishing control of the stock to the recipient.
One way to invest for your grandchildren is through a trust. You can place limitations on the funds given in this type of investment scheme.
Consider this resource for learning more on how to gift stock.
Investing for a Grandchild: Saving for Their Future
To ensure that they will be more successful than their parents, grandparents need to invest in the future success of their grandchildren.
Properly investing is a way for grandparents to demonstrate that they are committed to seeing generations succeed rather than struggle even if this means changing some things about their lives.
By providing financial support to their grandchildren, grandparents can empower them with the resources they need to live a better life.
A long-term goal for many parents and grandparents is that one day both children and grandchildren will be able to sustain themselves without any outside help. Investing in a grandchild’s future shows you are committed to this goal.