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Best Investment for Newborns: 529, CD, Savings, Bonds - What to Choose

Depending on your experience and what you want to accomplish, I strongly suggest a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts.

These are probably the best vehicles to use since they may invest in almost everything imaginable:  stocks, bonds, mutual funds, CDs and more.  The assets are held in the name of a custodian (you or a parent for instance). The accounts become the property of the recipient when they reach the age of majority.

his arrangement provides the kind of flexibility that you seem to want:  money for your nephews but not necessarily tied up exclusively for education. Funds may be used at any time for any reason for the benefit of the recipient.  Whether this is for sports camp, music lessons, tutoring, college or a car, the custodian can decide to release funds for any legitimate reason.  

An IRA is out of the question since these may only be established if they have earnings. 

A 529 savings plan may be set up for their benefit but the funds need to be used for qualified educational expenses in order for the growth and income to be tapped tax-free.  Otherwise, there will be an early withdrawal penalty (10%) as well as income taxes on distributions.

Now that we've gotten beyond the type of account to use, the next question is what to have inside the box.  If you establish the UGMA/UTMA account on a brokerage or mutual fund company platform, you'll have access to nearly everything including gold investments (usually in the form of mutual funds or exchange traded funds).

Your best choice is to use a mutual fund because it offers a convenient way to pool your money with professional money managers.  Given the dollar amounts involved, you don't want a large percentage of your investment being eaten away by trading costs.  And over time, equity investments have had the best chance at beating inflation and growing - and usually out-pacing whatever you could make on a CD or money market.

Dimensional Fund Advisors offers the DFA World Allocation (DGSIX) with a $250 minimum and it has had a very good multi-year track record.  This fund is available through Registered Investment Adviser firms like the one I work for. 

I personally like the philosophy and cost structure of Vanguard Funds and particular think that a balanced fund like Vanguard Balanced Investors (VBINX) would be very suitable over the long term.  But the minimum fee is a bit hefty for you at $3,000 but worth considering if you can commit to an auto-investment program.  For more information try Vanguard directly.

Another option is Amana Growth Trust (AMAGX) which has a minimum of $250. The expense ratio is a little high compared to others but not unreasonable considering you're not paying any commissions or 12b1 fees.

Another low-cost option where you can develop a globally diversified, tax-efficient portfolio of optimized Exchange Traded Funds is through Betterment. I use their institutional platform and this works great providing access to world class, tested systems as well as rebalancing.

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Comments (2)   |  4 years, 8 months ago from Amesbury, MA