3 Best Investments for Grandchildren: Ways to Save & Invest

How best to invest for your grandchildren? It’s a question that many grandparents ask themselves when considering what to do with their savings and investments. If the answer is “well,” then you should be focusing on investing strategies that will best benefit your grandchildren.

Many grandparents spend time trying to figure out how best to save money, but fail to invest it in ways that would help their grandchildren. This is a huge mistake.

In this article, we’ll discuss the best investments for grandchildren and how you can start investing for them today!Best Investment Accounts for Grandchildren—Top PicksWhy Invest for Grandchildren?

The cost of raising children has climbed considerably in recent years, along with account balances for many grandparents who have benefited from a series of strong economic cycles since the 1950s and years of compounding returns.

While not always feasible, many grandparents choose to invest for their grandchild’s future to help them get a head start in life.

Investing – and saving – are two of the most important things you can do for your grandchildren, especially as college tuition costs continue to climb.

Fortunately, these investments don’t have to be big or complicated; there are plenty of ways that every grandparent can help without breaking the bank.

By starting early and investing steadily, the money you grow for them can benefit them financially, personally and professionally.

What Costs do Grandkids Face?

The cost of college tuition is sky-high these days. In fact, for many families it’s the most expensive cost they’ll ever have to face! And that cost just keeps rising every year.

What this means for grandparents with grandkids destined for higher education, trade schools, apprenticeships or other training programs required for developing high income skills (or soon headed there) is that you need to be saving and investing now if you want to avoid taking on costly student loans.

And, before you invest in anything else for your grandkids, take a look at their cost of college. This may be the single most important investment decision that will impact them throughout their lives.

The best investments for grandchildren are those that pay off long-term costs like these and protect against future ones too!

Consider making some of the best investments for grandchildren to give them a head start and not fall into a financial hole early in life.

Best Investments for Grandchildren

Investment Accounts for Grandchildren: Taxable

1. Joint Brokerage Accounts

The standard type of brokerage account is an individual brokerage, in which one person’s name is listed as the account owner.

A jointly owned brokerage account, however, allows two or more people to sit on the account’s title and act as owners of all assets within the account.

These accounts most commonly exist between spouses, but they can also be opened between multiple family members (say, a parent and child or grandparent and grandchild) or two or more individuals who share financial goals (say, unmarried partners or business partners).

When a grandparent and grandchild have a jointly owned brokerage account, they can share in the decision-making of what to buy and sell. Many investing apps for kids allow you to open a brokerage account with joint ownership.

Is your teen interested in jumpstarting their financial future? Do you want them to build smart money habits along the way?

Of course you do! Learning early about saving, spending and investing can pay off big when you start on the right foot. And one tool that can help your teen get that jump is the Fidelity® Youth Account—a brokerage account owned by teens 13 to 17 that’s designed to help them start their investing journey. They can use their own brokerage account to start their investing journey by trading most U.S. stocks, exchange-traded funds (ETFs), and Fidelity mutual funds in their accounts.

Your teen will also get a free debit card with no subscription fees, no account fees, no minimum balances, and no domestic ATM fees. And they can use this free debit card for teens⁴ to manage their cash and spend it whenever they need.

And as for building smart money habits? You and your teen can access Fidelity’s Dedicated Youth Learning Center, which is packed with materials developed specifically to help teens develop good financial habits.

Controls Parents Want and Need

A parent or guardian must have or open a brokerage account with Fidelity® to open a Fidelity® Youth Account. For new Fidelity® customers, opening an account is easy, and there are no minimums and no account fees.

Parents and guardians have plenty of tools they can use to monitor their teen’s activity: They have online account access, can follow monthly statements and trade confirmations, and can view debit card transactions made in the account.

To make it even easier, you can set up alerts to notify you of trades, transactions, and cash management activity, keeping you firmly in the loop on actions your teen takes across the Fidelity® Youth Account’s suite of products.

If your teen has an interest in learning about investing and taking their first steps toward building their financial journey, you should consider opening a Fidelity® Youth Account. The account comes custom-built for their needs, which will help them become financially independent and start investing for their future.

Your teen will get a $50 reward once they download the Fidelity mobile app and activate their Youth Account².
No monthly fees or account minimums³.
They can invest in stocks for as little as $1 with fractional shares.
Your teen can learn to save and spend smarter with their own debit card with no domestic ATM fees⁴.
Teens can link their account to mobile payment apps like Venmo and PayPal⁵.
Parents can set up alerts and monitor their teen’s account activity online, and through statements, trade confirmations and debit card transactions.
Dedicated Youth Learning Center to help jumpstart your teen’s financial learning and build better money habits.

Pros:

No monthly account fees
Signup offer available to new users
Comprehensive financial suite for teens

Cons:

Parent must be a Fidelity account holder
Account balance doesn’t accumulate interest
No chore or allowance system

2. Custodial Accounts

Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow you to put money and/or assets in trust for a minor child or grandchild.

As the custodian, or trustee, you manage the account until the child reaches the age of majority (18 to 21 years of age, depending on your state). Once a grandchild reaches the age of majority (adulthood), they become the account owner and can do as they please with the funds.

This means they don’t have to use the money for educational expenses if they don’t wish.

While no contribution limits exist for grandparents to give money to grandkids, they can contribute up to $17,000 per year per individual ($34,000 per married couple who files jointly) to avoid triggering the gift tax in 2023.

One consideration when deciding if a custodial account makes sense for the child is that the balance in a custodial account will count against your child’s assets on the Free Application for Federal Student Aid, or FAFSA.

Students are expected to contribute a higher percentage of savings versus what their parents might be able to, usually 20% vs. a maximum 5.6% of savings for the parents.

You may consider a popular custodial account like Greenlight + Invest, a kid-friendly investing account and debit card.

Price: Acorns Early: $5/month

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.

Pros:

Robo-advisor with affordable fees (on larger portfolios)
Fixed fee model
Round-Ups

Cons:

High fixed fees for small balances
No self-directed investing options
Limited investment selections

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Investment Accounts for Grandchildren: Tax-Advantaged

3. 529 Plans: Save for College and Qualified Education Expenses Tax Free

A 529 plan is a special tax-advantaged investment plan that lets families save for the current and future costs of schooling for a beneficiary.

Traditionally, these plans could only cover the qualified educational expenses for college but tax reform broadened the eligible expenses to cover K-12 costs as well.

When thinking of one of the best ways to invest $1,000 for a child or more each year, consider a 529 savings plan. These can help your grandchild financially while limiting your own tax liability when you liquidate the investments held in the account.

Plans have high limits on how much you can contribute to them. Contributions are made after-tax this way and grow tax free from federal income tax like a Roth account if the funds get used for qualified educational expenses. Most states also allow tax-free withdrawals as well.

You can contribute up to the annual federal gift tax exclusion amount each year, which is $17,000 per person per individual ($34,000 for married couples who file jointly) in 2023.

Like with custodial accounts above, this “annual exclusion” represents the maximum amount you can transfer as a gift to each person without incurring a gift tax.

If you can, you might consider “superfunding” your grandchildren’s 529 plan by contributing five years of gifts all at once per grandchild per person. This provides an ample amount of money upfront without incurring the gift tax.

Understandably, not every grandparent can swing such a contribution, especially for multiple grandkids ($150,000 per grandchild if both grandparents contribute) to cover the entire cost of college.

But, if it’s possible, this let’s the money compound over multiple years from when your grandkids are young kids.

Be aware, though, using this option carries complicated rules, so consider getting the help of a tax professional to navigate these contributions successfully.

Also, 529 plans recently got the greenlight to improve how you can use the funds held within the account appropriately (i.e., without incurring the 10% withdrawal penalty).

The SECURE Act created multiple provisions intended to improve retirement planning and savings plans.

The new rules from this law allow 529 plan funds to go toward paying off up to $10,000 in student loans as well as pay for expenses related to registered apprenticeship programs.

College Savings Plans

College Savings Plans replicate similar mechanics of other tax-advantaged savings plans like 401(k)s and individual retirement accounts (IRAs).

Contributions you make get invested into mutual funds or other investment vehicles like age-based investments called target date funds.

These differ from the types you see in retirement plans though, because these have underlying investments that become more conservative as your grandchild nears college age, not retirement.

One option to consider for opening a 529 College Savings Plan is through the company Backer. The company provides top-tier 529 Savings Plans which can collect gifts from family and friends through social savings.

You can share an invite code for friends and family to make contributions to a 529 Savings Plan for birthdays, holidays or other noteworthy events (like making honor roll!).

Prepaid Tuition Plans

While not available in every state, prepaid tuition plans (also called guaranteed savings plans) allow you to freeze today’s tuition rate for when your grandkid attends college in the next 18 years.

Essentially, these prepaid tuition plans act like a presale on college tuition and can be an alternative manner for building college savings.

The tuition program pays back the state’s eligible institutions to any beneficiaries in college. If your grandchild ends up attending a school out of state or at a private institution, you can transfer the value or apply for a refund.

4. Traditional and Roth IRAs

An individual retirement account, or IRA, is a tax-advantaged savings account where you keep investments such as stocks, ETFs, bonds, mutual funds and other asset types.

These accounts typically start with young adults because they require the account owner to have earned income.

However, if your grandchild has a summer job or other form of documented income, you can open a custodial Roth IRA (or traditional) for them and match their contributions up to the annual contribution limit.

Then, you can help your grandchildren to choose the best investments that grow with tax advantages from their start as young children and onward into adulthood.

If you’d like to contribute from your IRA toward their education expenses, you can. While you don’t need to begin taking required minimum distributions (RMDs) until reaching age 72, you can begin as early as when you reach age 59½.

In fact, you can also start earlier if necessary. You can withdraw money from your traditional or Roth IRA before age 59½ without paying a 10% additional tax if the funds go toward paying for qualified higher education expensesfor yourself, your spouse, your children or grandchildren in the year you make the withdrawal.

This waiver only applies to the 10% penalty as you’ll still need to pay income taxes on the distribution unless it is designated as a Roth IRA.

Though, using these accounts to pay for your child or grandchild’s college education can come with its own set of drawbacks:

If you want to avoid dipping into your retirement savings, you may be able to set up a Roth IRA in your grandchild’s name. Though, this comes with a catch.

Namely, the grandchild (and not you) must have earned income from a job during the contribution year.

You have the ability to fund the annual contribution to the maximum amount so long as they have enough in earnings to cover what you deposit. In fact, the IRS doesn’t mind where the money originates, so long as it doesn’t exceed what your grandchild earns in a year.

For example, if your grandchild works as a lifeguard and earns $1,000 for the summer, you can let your grandkid keep the money and you contribute to their Roth IRA instead.

That way, your grandchild can do something else with their earnings while you still set aside money in their retirement account.

Remember, they need to have earned income for anyone to contribute to their custodial IRA.

How to Open a Custodial IRA for Your Grandchild

If you wish to open a custodial IRA for your grandchild, your job as the custodian is to control the assets in the account and manage them on their behalf until reaching the age of termination for their state of residence.

Work with them while they’re young and looking to engage in teenage investing opportunities. This can provide valuable information and guidance as a way for teaching kids about money management.

Here’s how to do it: If your grandchild is underage (under 18 or 21 years old, depending on your state of residence), you will find many of the best stock investing apps for beginners as well as banks and mutual funds will let you set up a custodial IRA.

One such app, M1 Finance, allows you to open a custodial IRA through enrolling in their M1 Plus subscription. For the first three months, the company offers this as a free service.

You can use this app as a robo-advisor to automate contributions and invest them automatically into a portfolio of stocks and index funds to provide instant diversification with long-term upside.

. 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

1. Stocks

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.

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 – Best for Custodial IRAs

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 three months for free ($31.75 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.