Investing for children

What is the best way to invest for children? I don't mind diversifying funds to different accounts, but I want to earn the most that I can without getting bombarded with taxes at the end of the year. Currently, my wife and I are contributing $200 a month for my 1 year old and will do the same in the coming months when we have our other child. I currently keep the money in a generic savings account and a CD.

With $200 per child, how would you allocate your childs money?

TProg,

It is good that you are considering your children's savings.

I know a family that is doing this in a smaller way, they are using an ING savings account at this time.

You do have these savings accounts in the child's name? The child (single dependent) would need $850 of unearned (investment) income before they would need to file a tax return. If your child exceeds that amount, you are somethings very well, keep it up.

If the child has enough to open an account with a broker, I would invest in an aggressive fund and monitor it's performance vs peers very closely. When that fund performed poorly vs peers, (lower than the 75percentile) I would move to a higher performing fund.

TProg,
I doubt its the 'best way' to save, as I am self-taught through the school of hard knocks and disastrous dot.com era investments rather than college, but for our daughter we've invested/saved with an eye toward her college education as follows:
- $141/month in our state's Pre-Paid College Plan. We started this when the plan first opened 13 or 14 years ago and it covers her tuition for 4 years at any of our state's public universities! We'll have approximately $25k invested by the time she starts college, but her full tuition for 4 years is guaranteed by the state. If you're plan is to save for college, you might want to check your state's available options, 529 plans, etc.
- $100/mo into various mutual funds inside a Uniform Gift to Minors Account for the past 7 years.
- We also had put $1000 into a single Utilities mutual fund about 10 years ago in a UGMA, and it had ballooned nicely, reaching $4000 this spring. Fortunately, I decided to take some profits off the table and broke this up, diversifying it into 4 individual funds at $1k each... lucky timing as the original Utility fund has been heading slightly south ever since.
- $50/month in EE Savings Bonds in my wife's name with our daughter as beneficiary. These can be used tax-free for education (laptop, room & board, textbooks, etc.)
- We took our daughter to the bank when she was pretty young (3, 4?) and established her own savings account. And taught her (coerced her?) to put half of all her birthday/Christmas money in here and the other half she kept in a piggy bank at home for her spending (most years, she just put the entire amount in the bank). She now adds occasional babysitting money here as well and has over $1,200 saved up (probably will go toward a car/insurance next year).

Our daughter has no idea we have anything saved for her college education, and we keep pushing her to get good grades and work toward a scholarship - fingers crossed. Then we could blow those savings on ourselves! :)

Recently I've read that it might not be the best idea to have a lot of money in a UGMA/UTMA, as that money is in the 'students' name and it may take them out of the running for some scholarships ("hey, this kid has $10,000 in the bank, she don't need no stinking scholarship"). But at the same time, that money has essentially grown tax-free all these years, as it was in our daughter's name and the capital gains never counted on my/wife's tax returns (and our daughter never earned enough in a given year to have to file a tax return).
Another thing about UGMA/UTMAs, is that legally/technically when our daughter turns 18, she can take this money and spend it any way she wants............. if she knew it existed :)

Best of luck,
Rookie

Edited to add: our contributions to the state pre-paid college plan are deductible on our state income tax return, up to $2,000 each year - a nice benefit on top of the plan itself.
Also, TProg you might find this Kiplinger article of interest:
http://www.kiplinger.com/columns/ask/archive/2007/q0730.htm

Rookie_Investor,

You write, "Another thing about UGMA/UTMAs, is that legally/technically when our daughter turns 18, she can take this money and spend it any way she wants............. if she knew it existed".

The custodian of the account (that is probably you) has a legal obligation to turn this over to the child (daughter in your case) at age 18. She may be totally responsible for reporting the earnings on Her income tax return.
So she should be able to find out that the UGMA/UTMA exists. Then there may be some other family issues about trusting parents.

At age 18 you should be telling her this is all her money and to please invest it wisely and use it wisely and come to Mom and Dad for counsel.

clydewolf,
No worries, I was half-joking about "if she knew it existed".... it's definitely her money, she just doesn't know about it yet. Please don't call the UGMA/UTMA tax police :)
We've done a pretty fair job in teaching our daughter about money & spending, savings & checking accounts, and a little on credit, etc, and we'll continue to expand her financial knowledge as she gets older. So I feel pretty confident that she'll do what's in her best interest with the money we've put away - and of course, we're not just gonna give her the keys to the vault and say "her ya go, this is all yours, have fun". In all likelyhood she'll use it for her college expenses, and maybe some of it to boost her Roth savings (once she has one).

Rookie

I only do 529, and will open a savings account for the sole purpose of teaching them about money and savings.

just a habit of saving more than spending.. and finding ways how to make money more,,teaching them to be little biz tycoons in the making!

Its very nice future plan for our children.

We are having twins in June. My plan is to open 2 mutual funds in kids name:

$1000 into PRPFX (permanent portfolio)
$1000 into PRFDX (TRP equity income)

taxes not a concern if investments are in kids names. If another $1000 is available, I am thinking VFINX with a discussion of investing coming up with kids arround age 12 or 14 (which fund is most aggressive, did it get best return?).

The first two funds listed will accept monthly contributions- $50 at T Rowe Price, and $100 for Permanent portfolio.

yes parents should preplan for their child bright feature.When they turn 18 years then they will plan for their future.And also they look after their family and friends.Really parents should pre plan for their child.

We are having twins in June. My plan is to open 2 mutual funds in kids name:

$1000 into PRPFX (permanent portfolio)
$1000 into PRFDX (TRP equity income)

taxes not a concern if investments are in kids names. If another $1000 is available, I am thinking VFINX with a discussion of investing coming up with kids arround age 12 or 14 (which fund is most aggressive, did it get best return?).

The first two funds listed will accept monthly contributions- $50 at T Rowe Price, and $100 for Permanent portfolio.


yes you are right we should have good features about our children. i have my own decision about my children.

I think we shouldn't post under multiple IDs hoping people click on our signature links.:mad:

Stuffed animal accessories? I suppose my Teddy Weddy does need some Prada and bling.

I only do 529, and will open a savings account for the sole purpose of teaching them about money and savings.


My parents did this for me when I was very young, and it has paid off extremely well, in terms of saving money for me and teaching me about finances and how to plan ahead.

Establishing a healthy respect for money in your children is a very good thing. I applaude you. I would tend to keep the balances of both savings accounts as even as possible, so as not to create problems later on.

Think its best to invest on your childrens future, also try to teach them how to value and save money for future use. :)

Investing into the future of kids by teaching them the right values is by far the most important thing but it is also rather crucial to make sure that there will be some money for the case that the parents pass away to early.

I would invest in a fund which is well diversified and its risk well spread. That should provide that after ten or more years you will have a nice profit on that.

its never to early to save.