Top 5 Ways to Invest in your Kids' Future in 2024

We all know kids are expensive.

But have you ever stopped to think about how expensive they really are? It's like taking on a mortgage! Experts claim it now costs more than $300,000 to raise a child through the age of 18. This is simply to cover the basics!

Tack on college expenses and you're looking at another $142k on average for an undergraduate degree. We're all trying to give our kids the chance to live their best lives, but wow, it's getting tough to do so.

Top Ways to Invest In Your Kids’ Future This Year

Here are the top five ways to invest in your kids' future:

1. 529 Plan

2. UGMA / UTMA

3. Roth IRA

4. Brokerage Account

5. Savings Account

Each of the above are super simple to start, and should only take a few minutes to set up.

One piece of advice before we dive in. Like flight attendants advising passengers to put on their oxygen masks before assisting the person next to them, if your finances aren't in order, you should consider handling your business before saving for anyone else.

The best thing that you can do is lead by example for your kids, including how you manage your finances. This includes having (or creating) a budget, paying down debt, and saving for retirement.

529 Plan

Less commonly known as qualified tuition plans, 529 plans are tax-advantaged savings accounts that allow you to grow money tax-free if the funds are used for a qualified education expense.

Qualified expenses include tuition, supplies, and room and board. 529 plans were created to help families save for future college expenses, but recently expanded to include K-12 tuition and certain apprenticeship programs.

The two types of 529 plans are education savings plans and prepaid tuition plans.

• Education savings plans are the most common account type - it's the one that we chose for our daughter. Education savings plans allow savers to invest funds for everything listed above and carry fewer residency requirements (if at all).

• Prepaid tuition plans are much more restricting. According to the SEC, you essentially purchase units or credits at a participating college or university at the current price for the beneficiary. You aren't able to use funds for K-12 tuition and there is typically a residency requirement.

Every state sponsors one of the 529 plans, meaning there are plenty to choose from. Check out this in-depth comparison chart to learn more about the options available.

You have the ability to switch beneficiaries as well, which is a great option is your child ends up taking a different path. You can even continue saving and pass it to their children instead. Something to consider when building generational wealth, especially with the ever-rising costs of education.

Pro tip: you don't have to stick with your state of residence's 529 plan. I reside in North Carolina but opened a 529 for my daughter through the State of New York.

UGMA / UTMA

The Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are great options if you'd like to put money away for your kid that isn't tied strictly to education.

Both custodial accounts allow you to transfer and invest financial assets to your child without a trust.

A key difference is that the UTMA allows property to be included in the portfolio, including anything from cars to real estate. UGMAs and UTMAs allow you the freedom to invest in whatever you see fit for your child, it isn't limited to education.

One word of caution - you may be putting money away for something responsible such as starting a business or purchasing a home, but as soon as your child reaches adulthood (according to your state's definition) these assets become theirs to use as they see fit. That means handing over the entire account to your 18-year-old, who could very well blow it all on an epic vacation or a new sports car.

Also, as UGMAs and UTMAs are legally your child's assets, it has a greater impact on financial aid applications.

According to Saving for College, these accounts can reduce financial aid eligibility by 20% of the asset value.

In comparison, 529 plans are considered your asset (your child is the beneficiary) which only reduces financial aid by 5.64% of the asset value.

One final thought, you aren't able to change beneficiaries for UGMAs and UTMAs, as again, it's in your child's name once they reach adulthood.

Roth IRA

A Roth IRA is a powerful investment tool for everyone, not only your kids.

It's one of my personal favorites and I wish I opened one of these earlier than I did as they allow you to grow your money tax-free if you satisfy the qualified distributions rules.

One way to access your personal Roth IRA funds early without penalty is if you use it to pay for your child's higher education costs.

No judgments either way, but I'd recommend leaving your Roth IRA funds alone so that you can take full advantage of compound interest and retire as early as possible (which you earned by working so diligently).

Similar to other investment accounts, you can open a Roth IRA in your child's name and serve as the custodian until they reach adulthood.

This is a great way to get a head start on your child's retirement, maximizing compound interest and setting them up for their latter years. Since it's in their name, they can also choose to use the funds how they wish when the time comes (including paying for qualifying college expenses).

One key thing to note, your child needs earned income to contribute to a Roth IRA. This includes anything from mowing lawns to bagging groceries. They're also limited to contribution limits - $7,000 in 2024 for everyone under age 50.

Brokerage Account

Brokerage accounts are another great way to invest in your kids' future. They're extremely flexible - you can invest in stocks, bonds, mutual funds, and ETFs. One downside is that these accounts are subject to capital gains taxes.

Brokerage accounts are available through countless brokers. Some of the biggest players include Vanguard, Fidelity, and Charles Schwab to name a few. Robinhood and Cash App allow you to easily invest in fractional shares, which is great if you only have a few dollars to invest.

One product to consider if you have a teenager is Fidelity's Youth Account, available for teenagers ages 13 through 17. It comes with a debit card and allows them to invest, all with your oversight and no monthly fees. There are several young adult savings accounts out there, Fidelity stands out due to the ability to invest and minimal fees. 

Savings Account

Okay, I know what some of you may be thinking, "can't I just throw some money in a traditional savings account for my kid?" The short answer is yes! You definitely can do that and I still believe it warrants being on this list.

Savings accounts are FDIC-insured, meaning that your child's money is safe for the most part.

If you're looking for a flexible but very conservative approach to investing money for your kids' future, this is still a good option to consider.

Plus, interest rates are high at the moment so you should earn a pretty decent return. The rates won’t stay high forever though, so keep a close eye on them to maximize your return over the long term.

Historically, savings accounts don’t keep up with inflation, meaning your money is actually losing value over time as it sits in your savings account.

Which option is best?

As with many financial decisions, there isn't a right or wrong answer but what works best for you and your family.

I think it's fantastic that you're even thinking about putting money aside for your child, not everyone is so lucky. When deciding on which path to pursue, ask yourself:

1. What are my hopes for my kids?

2. What attracts me to this specific type of account?

3. If I choose something with more flexibility, will they use it properly?

We don't have a crystal ball that can show us the future. Pick a way forward, raise your kid with good money values and the rest will fall into place.

You're not locked into only one path and can open different accounts as your child grows.

My wife and I have a toddler and opened a 529 plan for her shortly after she was born. It's a great way to save money tax-deferred and we still believe in the value of higher education.

As she gets older and my business grows, I plan on hiring her and opening a Roth IRA in her name.

As a teenager, I'd like to open a brokerage account for her as well.

My goal is to give my little one a good start, but that doesn't mean paying for everything. You want your children to "buy-in" to their education as well; apply for scholarships, get a job to cover living expenses, save for graduate school and put your wonderful money management lessons to good use.

Start saving today! The hardest step is getting started, but even if you only have a few dollars to spare, let compound interest work in your kids' favor.