What's the smartest way to invest money gifted to a child?
I was in a similar situation with my now 6 year old.  So I'll share what I chose.  Like you, I was already funding a 529. So I opened a custodial brokerage account with Fidelity and chose to invest in very low expense index fund ETFs which are sponsored by Fidelity, so there are no commissions.  The index funds have a low turnover as well, so they tend to be minimal on capital gains. As mentioned in the other answer, CDs aren't paying anything right now.  And given your long time to grow, investing in the stock market is a decent bet. However, I would steer clear of any insurance products.  They tend to be heavy on fees and low on returns.  Insurance is for insuring something not for investing. American Century has their Heritage Fund: https://www.americancentury.com/sd/mobile/fund_facts_jstl?fund=30 It has a good track record.  Here are all the mutual funds from American Century: https://www.americancentury.com/content/americancentury/direct/en/fund-performance/performance.html A mutual fund is a good wayway to go as it is not subject to fluctuations throughout the day whereas an ETF is. CDs pay less than the going rate so that the banks can earn money. Investing is risky right now due to the inaction of the Fed.  Try your independent life insurance agent. You could get endowment life insurance. It would pay out at age 21. If you decide to invest it yourself try to buy a stable equity fund. My 'bedrock' fund is PGF.  It pays dividends each month and is currently yealding 5.5% per year. Scottrade has a facility to automatically reinvest the dividend each month at no commission.  http://www.marketwatch.com/investing/Fund/PGF?CountryCode=US
"Although my kid just turned 5, he's learning the value of money now, which should help him in the future. First thing, teach him that you exchange money for goods and services. Let him see the bills, and explain what they're for (i.e. ""I pay ISP Co to give us Internet; that lets us watch Youtube and Netflix, as well as play games with Grandma on your GameStation""). After a little while, they will see where it goes, and why. Then you have your automatic bills, such as mortgage payments. I make a habit of taking out the cash after I get paid, and my son comes with me to the bank where I deposit it again (I get paid monthly, so it's only one extra withdraw). He can physically see the money, and understand that if the stack is gone, it's gone. Now that he is understanding things cost money, he wants to make money himself. He volunteers to help clean up the kitchen and vacuum rooms in the house, usually without being asked. I give him a dollar or two for the simple chores like that. Things like cleaning his room or his own mess, he does not get paid for. He puts all his money into his piggy bank, and he has some goals in mind: a big fire truck, a police helicopter, a pool, a monster truck, a boat. Remember he's only 5. He has his goals, and we have the money he's been saving up. We calculate how many times he needs to vacuum the living room, or clean up dishes, to get there, and he realizes it takes a long time. He looks for other ways to make money around the house, and we come up with solutions together. I am hoping in a year or two that I can show him my investments and get him to understand why they make or lose money. I want to get him in to the habit of investing a little bit every few months, then every month, to help his income grow, even if he can't touch the money quite yet." "given your time frame I'm not sure if investing in a 529 is your best option. If you're investing in a 529 you may have to deal with market volatility and the amount you invest over the course of three years could be worth less than what you had initially invested when it comes to your child's college education. The main idea of starting a plan like a 529 is the time-frame for your investments to grow. You also have the option of ""pre-paying"" your child's college, but that has restrictions. Most of the state sponsored pre-pay plans limit you to state schools if that wasn't obvious. Also, the current political situation is tricky, and may influence the cost of education in ~3-4 years, but I'm not sure this is the proper place for that discussion. Also, as far as the viability of these, it depends state-by-state. I live in Illinois and don't think I would count on a payout given our current financial situation. You could, however, look into paying tuition now for a state school and it will be risk free in terms of inflation, but again, it's hard to anticipate the political scope of this. They also have private pre-pay plans, but that would limit your child's university options just as the state pre-pay. Check out this investopedia article on 529 plans, it's basic but will give you a high level overview. Bankrate has an overview as well." "First - for anyone else reading - An IRA that has no beneficiary listed on the account itself passes through the will, and this eliminates the opportunity to take withdrawals over the beneficiaries' lifetimes. There's a five year distribution requirement. Also, with a proper beneficiary set up on the IRA account the will does not apply to the IRA. An IRA with me as sole beneficiary regardless of the will saying ""all my assets I leave to the ASPCA."" This is also a warning to keep that beneficiary current. It's possible that one's ex-spouse is still on IRA or 401(k) accounts as beneficiary and new spouse is in for a surprise when hubby/wife passes. Sorry for the tangent, but this is all important to know. The funneling of a beneficiary IRA through a trust is not for amateurs. If set up incorrectly, the trust will not allow the stretch/lifetime withdrawals, but will result in a broken IRA. Trusts are not cheap, nor would I have any faith in any attorney setting it up. I would only use an attorney who specializes in Trusts and Estate planning. As littleadv suggested, they don't have to be minors. It turns out that the expense to set up the trust ($1K-2K depending on location) can help keep your adult child from blowing through a huge IRA quickly. I'd suggest that the trust distribute the RMDs in early years, and a higher amount, say 10% in years to follow, unless you want it to go just RMD for its entire life. Or greater flexibility releasing larger amounts based on life events.  The tough part of that is you need a trustee who is willing to handle this and will do it at a low cost.  If you go with Child's name only, I don't know many 18/21 year old kids who would either understand the RMD rules on IRAs or be willing to use the money over decades instead of blowing it.  Edit - A WSJ article Inherited IRAs: a Sweet Deal and my own On my Death, Please, Take a Breath, an article that suggests for even an adult, education on how RMDs work is a great idea." "Smart money (Merriam-Webster, Wiktionary) is simply a term that refers to the money that successful investors invest.  It can also refer to the successful investors themselves.  When someone tells you to ""follow the smart money,"" they are generally telling you to invest in the same things that successful investors invest in.  For example, you might decide to invest in the same things that Warren Buffett invests in.   However, there are a couple of problems with blindly following someone else's investments without knowing what you are doing. First, you are not in the same situation that the expert is in.  Warren Buffett has a lot of money in a lot of places.  He can afford to take some chances that you might not be able to take.  So if you choose only one of his investments to copy, and it ends up being a loser, he is fine, but you are not. Second, when Warren Buffett makes large investments, he affects the price of stocks.  For example, Warren Buffett's company recently purchased $1 Billion worth of Apple stock.  As soon as this purchase was announced, the price of Apple stock went up 4% from people purchasing the stock trying to follow Warren Buffett.   That having been said, it is a good idea to watch successful investors and learn from what they do.  If they see a stock as something worth investing in, find out what it is that they see in that company." "First off, leaving money in a 529 account is not that bad, since you may always change the beneficiary to most any blood relative.  So if you have leftovers, you don't HAVE to pay the 10% penalty if you have a grandchild, for instance, that can use it.  But if you would rather have the money out, then you need a strategy to get it out that is tax efficient. My prescription for managing a situation like this is not to pay directly out of the 529 account, but instead calculate your cost of education up-front and withdraw that money at the beginning of the school year.  You can keep it in a separate account, but that's not necessary.  The amount you withdraw should be equal to what the education costs, which may be estimated by taking the budget that the school publishes minus grants and scholarships.  You should have all of those numbers before the first day of school.  This is amount $X. During the year, write all the checks out of your regular account.  At the end of the school year, you should expect to have no money left in the account.  I presume that the budget is exactly what you will spend.  If not, you might need to make a few adjustments, but this answer will presume you spend exactly $X during the fall and the spring of the next year. In order to get more out of the 529 without paying penalties, you are allowed to remove money without penalty, but having the gains taxed ($y + $z).  You have the choice of having the 529 funds directed to the educational institution, the student, or yourself.  If you direct the funds to the student, the gains portion would be taxed at the student's rate.  Everyone's tax situation is different, and of course there is a linkage between the parent's taxes and student's taxes, but it may be efficient to have the 529 funds directed to the student.  For instance, if the student doesn't have much income, they might not even be required to file income tax.  If that's the case, they may be able to remove an amount, $y, from the 529 account and still not need to file.  For instance, let's say the student has no unearned income, and the gains in the 529 account were 50%.  The student could get a check for $2,000, $1,000 would be gains, but that low amount may mean the student was not required to file. Or if it's more important to get more money out of the account, the student could remove the total amount of the grants plus scholarships ($y + $z).  No penalty would be due, just the taxes on the gains.  And at the student's tax rate (generally, but check your own situation). Finally, if you really want the money out of the account, you could remove a check ($y + $z + $p).  You'd pay tax on the gains of the sum, but penalty of 10% only on the $p portion. This answer does not include the math that goes along with securing some tax credits, so if those credits still are around as you're working through this, consider this article (which requires site sign-up).  In part, this article says: How much to withdraw -    ... For most parents, it will be 100% of the beneficiary’s qualified higher education expenses paid this year—tuition, fees, books, supplies, equipment, and room and board—less $4,000. The $4,000 is redirected to the American Opportunity Tax Credit (AOTC),... When to withdraw it -    Take withdrawals in the same calendar year that the qualified expenses were paid. .... Designating the distributee -    Since it is usually best that the Form 1099-Q be issued to the beneficiary, and show the beneficiary’s social security number, I prefer to use either option (2) or (3) [ (2) a check made out to the account beneficiary, or (3) a check made out to the educational institution] What about scholarships? -    The 10 percent penalty on a non-qualified distribution from a 529 plan is waived when the excess distribution can be attributed to tax-free scholarships. While there is no direct guidance from the IRS, many tax experts believe the distribution and the scholarship do not have to match up in the same calendar year when applying the penalty waiver. If you're curious about timing (taking non-penalty grants and scholarship money out), there is this link, which says you ""probably"" are allowed to accumulate grants and scholarship totals, for tax purposes, over multiple years." "If the investments are in a non-retirement, taxable account, there's not much you can do to avoid short-term capital gains if you sell now. Ways to limit short-term capital gains taxes: Donate -- you can donate some of the stock to charity (before selling it). Transfer -- you can give some of the stock to, say, a family member in a lower tax bracket. But there are tons of rules, gift limits, and won't work for little kids or full time students. They would still pay taxes at their own rate. Protect your gains by buying puts. Wait it out until the long-term capital gains rate kicks in. This allows you to lock in your gains now (but you won't benefit from potential future appreciation.) Buying puts also costs $, so do the ROI calculation. (You could also sell a call and buy a put at the same time and lock in your gains for certain, but the IRS often looks at that as locking in the short-term capital gain, so be careful and talk to a tax professional if you are considering that method.) Die. There's a ""step-up"" basis on capital gains for estates. source: http://www.forbes.com/2010/07/30/avoid-capital-gains-tax-anschutz-personal-finance-baldwin-tax-strategy.html" Firstly, there is also a lifetime gift+estate tax allowance. If the father's estate, including other gifts given in his lifetime, is unlikely to exceed that allowance, it might be simplest simply to give the whole amount now and count it against the allowance. Right now the allowance is $5.34M, but that seems quite a big political football and it's the allowance when you die that matters. Looking back at past values for the allowance, $1M seems like a pretty safe amount to bet on. If you want to avoid/minimize the use of that allowance, I would make a loan structured as a mortgage that will have $14K payments each year (which can then be forgiven). The points in Rick Goldstein's answer about an appropriate rate, and being able to give more if more notional donors and recipients can be used, also apply. So for example in the first year hand over $200K at 3.5% and immediately forgive $14K. The next year, forgive the interest charge of $6.5K and capital of $7.5K. Given the age of the daughter, I guess the father might well die before its all paid off that way, leaving some residue to be forgiven by the estate (and thus potentially incurring estate taxes). There might also be state gift/estate taxes to consider. Edited to reflect 2014 gift and lifetime exclusion limits. TL:DR: You should read something like The Little Book of Common Sense Investing, and read some of the popular questions on this site. The main message that you will get from that research is that there is an inescapable connection between risk and reward, or to put it another way, volatility and reward. Things like government bonds and money market accounts have quite low risk, but also low reward. They offer a nearly guaranteed 1-3%. Stocks, high-risk bonds, or business ventures (like your soda and vending machine scheme) may return 20% a year some years, but you could also lose money, maybe all you've invested (e.g., what if a vandal breaks one of your machines or the government adds a $5 tax for each can of soda?). Research has shown that the best way for the normal person to use their money to make money is to buy index funds (these are funds that buy a bunch of different stocks), and to hold them for a long time (over 10-15 years). By buying a broad range of stocks, you avoid some of the risks of investing (e.g., if one company's stock tanks, you don't lose very much), while keeping most of the benefits. By keeping them for a long time, the good years more than even out the bad years, and you are almost guaranteed to make ~6-7%/year. Buying individual stocks is a really, really bad idea. If you aren't willing to invest the time to become an expert investor, then you will almost certainly do worse than index funds over the long run. Another option is to use your capital to start a side business (like your vending machine idea). As mentioned before, this still has risks. One of those risks is that it will take more work than you expect (who will find places for your vending machines? Who will fill them? Who will hire those who fill them? etc.). The great thing about an index fund is that it doesn't take work or research. However, if there are things that you want to do, that take capital, this can be a good way to make more income. "Since I, personally, agree with the investment thesis of Peter Schiff, I would take that sum and put it with him in a managed account, and leave it there. I'm not sure how to find a firm that you like the investment strategy of.  I think that it's too complicated to do as a side thing.  Someone needs to be spending a lot of time researching various instruments and figuring out what is undervalued or what is exposed to changing market trends or whatever. I basically just want to give my money to someone and say ""I agree with your investment philosophy, let me pay you to manage my money, too."" No one knows who is right, of course.  I think Schiff is right, so that's where I would put the amount of money you're talking about.  If you disagree with his investment philosophy, this doesn't really make any sense to do. For that amount of money, though, I think firms would be willing to sit down with you and sell you their services.  You could ask them how they would diversify this money given the goals that you have for it, and pick one that you agree with the most." "Here's what I suggest... A few years ago, I got a chunk of change.  Not from an inheritance, but stock options in a company that was taken private.  We'd already been investing by that point.  But what I did: 1.  I took my time. 2.  I set aside a chunk of it (maybe a quarter) for taxes.  you shouldn't have this problem. 3.  I set aside a chunk for home renovations. 4.  I set aside a chunk for kids college fund 5.  I set aside a chunk for paying off the house 6.  I set aside a chunk to spend later 7.  I invested a chunk.  A small chunk directly in single stocks, a small chunk in muni bonds, but most just in Mutual Funds. I'm still spending that ""spend later"" chunk.  It's about 10 years later, and this summer it's home maintenance and a new car...  all, I figure it, coming out of some of that money I'd set aside for ""future spending.""" "Others have given some good answers. I'd just like to chime in with one more option: treasury I-series bonds. They're linked to an inflation component, so they won't lose value (in theory). You can file tax returns for your children ""paying"" taxes (usually 0) on the interest while they're minors, so they appreciate tax-free until they're 18. Some of my relatives have given my children money, and I've invested it this way. Alternatively, you can buy the I-bonds in your own name. Then if you cash them out for your kids' education, the interest is tax-free; but if you cash them out for your own use, you do have to pay taxes on the interest." There are two types of 529 programs.  One where you put money aside each month. The one offered by your state may give you a tax break on you deposits. You can pick the one from any state, if you like their options better. During the next 18 years the focus the investment changes from risky to less risky to no risk. This happens automatically. The money can be used for tuition, room, board, books, fees. The 2nd type of 529 is also offered by a state but it is geared for a big lump sum payment when the child is young. This will cover full tuition and fees (not room and board, or books) at a state school. The deal is not as great if they child wants to go out of state, or you move, or they want to go to a private school. You don't lose everything, but you will have to make up the shortfall at the last minute. There are provisions for scholarship money. If you kid goes to West Point you haven't wasted the money in the 529. The money in either plan is ignored while calculating financial aid. Other options such as the Coverdell Education Savings account also exist. But they don't have the options and state tax breaks. Accounts in the child's name can impact the amount of financial aid offered, plus they could decide to spend the money on a car. The automatic investment shift for most of the state 529 plans does cover your question of how much risk to take. There are also ways to transfer the money to other siblings if one decides not to go to college. Keep in mind that the funds don't have to be spent as soon as they turn 18, they can wait a few years before enrolling in college. If you plan on holding the money for 15 years, until your daughter turns 21, then advanced algebra tells me she is 6 years old. I think the real question is, what do you intend for your daughter to get out of this?  If you want her to get a real return on her money, Mike Haskel has laid out the information to get you started deciding on that. But at 6, is part of the goal also teaching her about financial stewardship, principles of saving, etc.? If so, consider the following: When the money was physically held in the piggy bank, your daughter had theoretical control over it. She was exercising restraint, for delayed gratification (even if she did not really understand that yet, and even if she really didn't understand money / didn't know what she would do with it). By taking this money and putting it away for her, you are taking her out of the decision making - unless you plan on giving her access to the account, letting her decide when to take it out.  Still, you could talk her through what you're doing, and ask her how she feels about it. But perhaps she is too young to understand what committing the money away until 21 really means. And if, for example, she wants to buy a bike when she is 10, do you want her to see the fruits of her saved money? Finally, consider that if you (or you & your daughter, depending on whether you want her to help in the decision) decide to put the money in a financial institution in some manner, the risk you are taking on may need to be part of the lesson for her. If you want to teach the general principles of saving, then putting it in bonds/CD's/Savings etc., may be sufficient, even if inflation lowers the value of the money. If you want to teach principles of investing, then perhaps consider waiting until she can understand why you are doing that. To a kid, I think the principles of saving & delayed gratification can be taught, but the principles of assuming risk for greater reward, is a bit more complex. "@MrChrister - Savings is a great idea. Coudl also give them 1/2 the difference, rather than the whole difference, as then you both get to benefit... Also, a friend of mine had the Bank of Dad, where he'd keep his savings, and Dad would pay him 100% interest every year. Clearly, this would be unsustainable after a while, but something like 10% per month would be a great way to teach the value of compounding returns over a shorter time period. I also think that it's critical how you respond to things like ""I want that computer/car/horse/bike/toy"". Just helping them to make a plan on how to get there, considering their income (and ways to increase it), savings, spending and so on. Help them see that it's possible, and you'll teach them a worthwhile lesson." MrChrister makes some good points, but I saw his invitation to offer a counter opinion. First, there is a normal annual deposit limit of $13,000 per parent or donee. This is the gift limit, due to rise to $14,000 in 2013.  If your goal is strictly to fund college, and this limit isn't an issue for you, the one account may be fine unless both kids are in school at the same time. In that case, you're going to need to change beneficiaries every year to assign withdrawals properly.  But, as you mention, there's gift money that your considering depositing to the account. In this case, there's really a legal issue. The normal 529 allows changes in beneficiary, and gifts to your child need to be held for that child in an irrevocable arrangement such as a UTMA account. There is a 529 flavor that provides for no change of beneficiary, a UTMA 529. Clearly, in that case, you need separate accounts.  In conclusion, I think the single account creates more issues than it potentially solves. If the true gift money from others is minimal, maybe you should just keep it in a regular account. Edit - on further reflection, I strongly suggest you keep the relatives' gifts in a separate account, and when the kids are old enough to have legitimate earned income, use this money to open and deposit to Roth IRAs. They can deposit the lesser of their earned income or $5000 in 2012, $5500 in 2013.  This serves two goals - avoiding the risk of gift money being 'stolen' from one child for benefit of the other, and putting it into an account that can help your children long term, but not impact college aid as would a simple savings or brokerage account.