Welcoming a new child into the world is a special thing. Whether it’s your own child, a niece or nephew, a grandchild, or a friend’s child, a healthy birth is a time for celebration.
For the financially savvy, it’s also an excellent occasion to plan ahead. By making a financial gift to the new child, you can help fund their future financial security.
Contributing to a college fund is an excellent way to support the child’s future. And early gifts can make a big difference — particularly if the money is invested.
If you gift just $100 to a child, invest it in a diversified stock market index fund like the S&P 500 (which has returned 10% per year, on average), that gift will be worth around $555 by the time the child turns 18.
In other words, any money you gift now could be magnified up to 5.5x if those funds are invested. Obviously, like any stock market investment, past performance is not necessarily an indicator of future return and will remain dependent on exactly what you invest in, the time horizon, etc.
This guide discusses the idea of a college fund gift for a baby. It covers how to go about making the gift, how to maximize its impact, tax considerations, and everything else you need to know.
Should You Give a College Savings Account As a Baby Gift?
Most gifts given to babies or their parents will be useful for just a short period of time. To make more of an impact, consider a financial gift.
Financial gifts — particularly if invested — can grow over time to create a substantial benefit for the child’s future. Starting or contributing to a college fund can potentially have the largest impact because it can help the child go on to a more successful career and secure financial future.
There are three main reasons to give a college fund gift for a baby:
- College is expensive — and getting more expensive each year
- Investments can compound over time
- It’s a meaningful, impactful gift
Each of these topics is covered in greater detail below.
1. College is expensive
College costs $35,331 per year, on average. For a four-year degree, that’s around $141,324.
Plus, expenses are rising quickly — at an average rate of 6.8% per year. If trends continue, college will cost far more when a baby born this year turns 18.
Most students use loans to pay for school, and the average student loan borrower has a balance of more than $30,000. This level of debt at a young age can create a huge financial burden.
A college fund gift can help pay for a child’s future college education and reduce their reliance on student loans. Plus, it helps the parents get a head start on their own saving strategies.
2. Investments have time to grow
The power of saving early really kicks into high gear when you invest the money.
If you gift $100 to a newborn baby’s college fund and invest it, it will grow to around $338 (assuming 7% average returns) by the time they turn 18.
The earlier you get started, the more the money will grow. This is due to compounding interest. Your initial investment earns profits — then you start to earn profits on your initial investments plus on the existing profits of those investments.
Compounding interest helps to maximize the power of your gift. A newborn baby has at least an 18-year time frame before they will need access to those funds, so it’s wise to invest any gifts you make.
The simplest way to invest money for children is to use EarlyBird. EarlyBird is an investment app that makes it simple for parents and loved ones to set up custodial investment accounts for young children. Funds can then be invested in prebuilt portfolios, with no investing experience required.
3. It’s a meaningful gift
Giving a financial gift shows the parents that you truly care about the child’s future. Eventually, the child will learn this, too (especially if you use EarlyBird, which allows you to attach video messages to your financial gifts).
Financial gifts go a long way toward making a positive impact on a young person’s life. In many cases, they can have a much larger impact on the child and the parents compared to a standard material gift.
How Can I Contribute to a College Fund for a Baby?
Now you know why to consider making a college fund gift for a baby, but how should you actually go about it?
Contributing to an existing account
If there is an existing investment or college savings account already set up, the simplest approach is to contribute to that account.
For this, you’ll likely need to ask the parents directly. Simply explain that you would like to contribute financially to the child’s college fund and ask if they have taken any steps to create an account.
Keep in mind that new parents are likely overwhelmed and sleep-deprived. It’s wise to approach this conversation tactfully — and perhaps to wait at least a few months after the baby arrives.
Working with the parents to open a new account
A more involved option is to help the parents open a new college fund for their child.
A legal adult must set up these accounts — but the child can be assigned as the beneficiary. The adult, in this case, is considered the “custodian.”
You may be able to open the account yourself and serve as the custodian. But for most situations, it makes sense for one of the parents to be the custodian.
That doesn’t mean you can’t help with the setup or help fund the initial investment. It all starts with selecting the right kind of account.
529 plans are state-sponsored investment vehicles that are specifically designed for college funds. Money invested in a 529 can grow tax-free, so long as the funds are eventually used for qualifying educational expenses.
If you are certain that the child will attend college, a 529 is a good option. However, keep in mind that there are tax penalties if funds are used for other purposes.
A Coverdell Education Savings Account (ESA) is another type of college savings fund that operates similarly to a 529. They are designed to help pay for educational expenses. They are somewhat more restrictive in how much can be contributed, and there are income limits involved.
UGMA custodial account
UGMA custodial accounts are the most versatile option. These accounts allow funds to be used for any purpose. The child will gain access to the account when they become a legal adult (age 18 in most states) and can then use the funds as they choose.
For example, the child could use the funds to pay for college — but they could also use it to start a business, go on an international trip, or even put a down payment on a house.
Note: A UTMA account is a similar account structure that can hold slightly different assets. UGMA accounts are generally recommended over UTMA accounts as they are more widely available.
EarlyBird is the simplest way to open a custodial investment account. EarlyBird is an investment platform that allows adults to set up UGMA investment accounts in just a few minutes. Then, funds can be invested in a diversified portfolio of stocks, bonds, ETFs, and more.
EarlyBird also enables collaborative investing in the children in your life. Once an account is set up, it’s simple for anyone to contribute gifts, which can then be invested on the child’s behalf. No investing knowledge or experience is required.
Contributing cash and leaving it to the parents
The final option is perhaps the simplest: Just write a check or gift cash directly to the parents.
You can explain that your intent is to help start the child’s future college fund. However, it’s likely best not to attach too many strings to it. You can certainly explain your intent, but understand that it will be up to the parents to see how that money could best be used.
A financial gift is truly a gift that matters. If you want to make a meaningful difference in a new baby’s future, a college fund contribution is an excellent option. Just be sure to not be overbearing if it’s not your own child — depending on your relationship with the parents, it may be best to simply gift cash and let them handle the details.
While accounts like 529s offer tax benefits, UGMA custodial investment accounts are much more versatile.
EarlyBird makes it easy to open a UGMA account on behalf of a child and start investing in their future.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.