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You don’t have to give your kids a fortune, but it might be nice to provide them with a tidy financial cushion.  

Image source: Getty Images

Very few people have a small pile of cash waiting for them as they move into the stressful new chapter of adulthood. What if you could change things up for your children? What if small, regular investments today could make life easier for them?

Here, we’re going to take a look at what would happen if you began investing on behalf of a child today.

Investment ideas

While there are many ways to invest, we’ll focus on these three.

1. 529 college savings plan at a glance

Who controls the account? Adult, on behalf of the child. Which children are eligible? Can be any age, but must have a Social Security number. Annual contribution limit In 2023: $17,000 per contributor, or $34,000 per couple Investment options Depends on the plan. Withdrawal limitations May be taken at any time. As long as the money is used for qualified education expenses, there is no federal income tax owed on withdrawals, including earnings.
Data sources: Fidelity and The College Investor

2. Custodial Account at a glance

Who controls the account? Adult, acting as custodian until the child reaches between 18 and 25 (depending on the state). At that point, assets are transferred to the child. Which children are eligible? Younger than 18. Annual contribution limit In 2023: $17,000 per individual, or $34,000 per couple. Investment options Range of investments, including stocks, mutual funds, options, bonds, CDs, and fractional shares. Withdrawal limitations May be taken at any time as long as it’s for the benefit of the minor.
Data source: Fidelity

3. Roth IRA for Kids at a glance

Who controls the account? Adult acts as the custodian until the child reaches between 18 and 25 (depending on the state) Which children are eligible? Must be under 18 and have employment compensation. For example: Pay for babysitting, mowing lawns, shoveling snow, delivering newspapers, or W-2 income. Annual contribution limit Cannot exceed minor’s earnings. The 2023 maximum contribution limit is $6,500. Investment options Full range of options, including stocks, mutual funds, options, bonds, CDs, and fractional shares. Withdrawal limitations Withdrawals can be taken at any time, and no federal income tax will be owed. Earnings are eligible for tax-free withdrawal once the account has been opened for 5 years and one of the following conditions is met: Child reaches age 59 1/2, death, disability, or qualified first-time home purchase.
Data Source: Fidelity and The Ascent

If you began investing today

The following table shows what would happen if you began investing $500 per month into one of these accounts. For the sake of this illustration, we’ll assume the investment earns an average annual return of 7%. We’ll also assume you stop investing on their behalf at age 18. In other words, if you begin investing for a 12-year-old, you would only make contributions for six years. Any other growth is strictly thanks to compound interest.

At $500 per month

Child’s Current Age At age 18, investment would be worth: By age 25, investment would grow to: Newborn $204,000 $327,600 Age 1 $185,000 $297,100 Age 2 $167,300 $268,600 Age 3 $150,800 $242,200 Age 4 $135,300 $217,300 Age 5 $120,800 $194,000 Age 6 $107,300 $172,300 Age 7 $94,700 $152,100 Age 8 $82,900 $133,100 Age 9 $71,900 $115,500 Age 10 $61,600 $98,600 Age 11 $51,900 $83,300 Age 12 $42,900 $68,900
Source: Author’s calculations

If $500 a month is a little steep for you right now, let’s take another look – this time we’ll see how much you could put away for your child by contributing $200 per month.

At $200 per month

Child’s Current Age At age 18, investment would be worth: By age 25, investment would grow to: Newborn $81,600 $131,000 Age 1 $74,000 $118,800 Age 2 $66,900 $107,400 Age 3 $60,300 $96,800 Age 4 $54,100 $86,900 Age 5 $48,300 $77,600 Age 6 $42,900 $68,900 Age 7 $37,900 $60,900 Age 8 $33,200 $53,300 Age 9 $28,700 $46,100 Age 10 $24,600 $39,500 Age 11 $20,800 $33,400 Age 12 $17,200 $27,600
Data source: Author’s calculations

It’s up to you (and the state in which you reside) to decide when to hand the account over. At that point, your child could use it to pay for school, make a down payment on a house, reinvest all of it, or build a healthy emergency savings account.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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