Beginning Investments for Teens

A friends high school and college age children were each recently given $1,500 as a gift from doting grandparents. Her question? What should she do with the cash, so the kids could realize some "emotional and financial" wealth from this generous gift in the future? Susan Abbott, from Busey Bank, offers several suggestions: Q1: Savings bonds come to mind... · Savings bonds may seem boring, but theyre a gift that grows. They are available at most banks, or can be purchased online at www.treasurydirect.gov. · Safe, secure and will earn fixed rates beginning in May of this year, accruing monthly and compounding semi-annually. Rates adjusted semiannually in May and October for bonds purchased the following six months. · The Treasury guarantees that a bond`s value will double after 20 years, its original maturity, and it will continue to earn the fixed rate set at the time of issue unless a new rate or rate structure is announced. · Savings bonds are available in electronic or paper form. Paper EE bonds are issued at a 50 percent discount from face value, and electronic EE bonds are issued at face value. Issue prices for EE bonds start at $25. Q2: What types of investment accounts might be available? · Certificates of deposit could be a possibility. Minimum balance requirements for some certificates are as low as $1,000, with maturities anywhere from three months or longer. CDs purchased at Member FDIC institutions are insured, so safety is guaranteed. Interest rates have increased as well, so its possible to invest your childs gift in a two or three year certificate of deposit and earn 3.50% or better currently. · Stocks or mutual funds are possibilities as well. Many accept investments as low as $50, but dont forget to add in the transaction fees. An investment adviser can help with the best choices for growth and value stocks and bonds. Investing in a few of the better companies that make products kids buy can make investing more interesting for a teenager, and give them a hands-on understanding of how investing works. · Putting the money into an education savings plan is definitely a gift that will pay off later. There are two primary tax-preferred options, the Coverdell Education Savings Account and a section 529 savings plan. The Coverdell account allows a maximum annual contribution of $2,000 per beneficiary and can be used to pay elementary and high school expenses as well as college costs, but income limits apply. With a section 529 savings plan earnings are not subject to federal income tax as long as the funds are used for qualified higher education purposes, and the giver retains control over the assets until they are distributed to pay for college. Q3: How about an IRA? · A Roth IRA could be an excellent choice. As long as the child earned money, you can put up to $3,000 or the childs total wages, whichever is less, into a retirement account for the child. The money grows tax-free, and could be a significant amount by the time the child is eligible to use it, either for retirement or earlier, as a first-home down payment. · Roth IRAs are meant as a retirement account however. They are available to the owner once they reach legal age, so be sure they understand the funds have been put there for long-term savings and appreciation. Contributions to a Roth can always be withdrawn penalty-free, and there are penalty-free provisions for withdrawing Roth earnings for education or a first-time home purchase. If the funds are withdrawn to buy a new car, for example, the gains will be taxed and the IRS will impose a 10 percent penalty for early withdrawal. So, be sure your teenager understands and is willing to let the money grow until age 59 ½.