Where Should I Put Money Now to Help My 6-Year-Old Niece Later?

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Dear Penny,

I’m trying to figure out the best way to invest in my 6-year-old niece’s future.

I’m 32, unmarried and child-free. I work full time for a decent salary and contribute to a retirement account, emergency fund — all that stuff. I want to put aside a little something to give my niece a boost in the future, but I’m not sure what my best option is. Her college will be paid for through the G.I. Bill, so a 529 savings plan doesn’t seem necessary. I’ve considered life insurance, but I’m not sure whether it’s worth buying at my age.

Plus, I’d like something she can take advantage of when she turns 18 — or maybe after college. I’ve started investing in a mutual fund at a pretty low rate; it’ll only be a few thousand dollars by that time. Are there options out there I’m missing?

Thanks for your help!

I Believe Your Children Are Our Future

Dear Believe,

Cool Aunt is my favorite job title. It sounds like it’s yours, too. I once returned from a shopping trip to my nephews asking, “Aunt Lisa, do you even have any money left?” I’m pretty sure I laughed unconvincingly as I told them, “Don’t worry, I have plenty of money.”

(The thing about nieces and nephews is that they don’t need to know about your never-ending student loan balance. But you don’t seem to have this problem. So I digress.)

Like you, I’ve often wondered the best way to save for these little ones’ futures. I’ve settled on cash gifts on their birthdays that go into savings accounts and leaving my retirement accounts to them in case of an emergency. But are there better options?

I asked Stephanie McCullough, founder and CEO of Sofia Financial, for a few tips.

One thing to consider, she said, is that the G.I. Bill may not cover all college costs. If your niece goes to a private or out-of-state school, for instance, it may still be worth opening a 529 college savings account.

“You get the tax-free growth and no tax on withdrawals if they’re used for qualified educational expenses, which can include things like laptops and internet service,” McCullough said by email. A 529 won’t affect your niece too much when she fills out her financial aid application, she added.

Another option is a Uniform Transfer to Minors Act (UTMA) account. Also known in some states as a Uniform Gift to Minors (UGMA) account, “it’s a way to give to a minor while the adult still retains custody of the assets on behalf of the child,” McCullough explained. “Once your niece turns 21, she gains legal rights to the money and can do whatever she wants with it.”

Either way you invest, McCullough noted that you still have to think about what to own inside of either one of these accounts. “Pay attention to fees and expenses as well as the level of risk you’d like to take,” she advised.

What about life insurance? You could take out your own policy or even get a policy for your niece. But you’ll still have to pay premiums each year. “If you want the most flexibility in terms of annual contributions, you might prefer to go with one of the investment options,” McCullough said.

Whichever option you choose, I think you’ll easily maintain your Cool Aunt title.

Have a tricky money question? Write to Dear Penny at [email protected].

Lisa Rowan is a personal finance expert and senior writer at The Penny Hoarder, where she’s the voice behind Dear Penny. For more practical money tips, visit www.thepennyhoarder.com.