The Best Investment: Teaching Your Children to Save and Invest
A 2022 Gallup Poll found that 58% of all adult Americans own stock. The top 1% owns more than half the total amount invested among those who own stock. 1 Making investing possible for your children, nieces, nephews and other loved ones may be the key to improving their financial future and getting them off to a good start in adulthood. Here are a few ways to help your children develop good habits regarding saving and investing.
Start Them Saving Early
If you start your children early with good saving habits, these habits may continue for the long term. Help your children understand that they may work to earn money—from doing chores around the house to babysitting or mowing lawns—and use this money to save for major purchases. You may provide additional incentives to save by offering to match them, dollar-for-dollar, in savings to purchase a big-ticket item.
Explaining the Benefits of Investing
Once your child understands the benefits of saving, it is time to introduce the advantages of investing. One key concept is that of compounding returns over the long term. With this idea, a few dollars, invested early, may provide nice returns when invested in income-producing assets. The younger your child is when they begin investing, the more time they have to compound returns and recover from potential losses. With a decent investment strategy, they may develop good habits and independence as adults. Investing might help your child learn to take managed risks, practice delayed gratification, and set meaningful future goals.
Research Investment Accounts for Children
After your child gains an interest in investing, a question may arise—where should these funds be placed? There are a few options depending on the child's income and assets.
A custodial Roth IRA allows your child to invest their earnings, post-tax, into an individual retirement account. These funds may grow for years, pay for qualified educational expenses or help fund their retirement.
A custodial trust account, such as a UGMA or UTMA trust, may be opened for the benefit of a child. The person who opens the account is the custodian who remains in charge of the assets until the child becomes a specific age.
A brokerage account is the most flexible type of investment account in terms of deposits and withdrawals. Your child may add funds to the account and select their investments from the various available options.
Because investing may come with some tax consequences, particularly for minors claimed on others' tax returns, it is important to talk to a financial professional before opening an account for a minor. Your financial professional may help you manage potential tax pitfalls and recommend an appropriate account for your child.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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1 What Percentage of Americans Own Stock?