Cute toys and outfits are fun presents to give to a baby, but he'll most likely outgrow them before the year is out. Investment gifts will last until he's grown and perhaps longer. An investment can help the baby save for future schooling or just for some rainy day many, many years away.
United States savings bonds are a classic investment gift for babies. The bonds available as of 2012, EE and I bonds, earn interest for up to 30 years. Both can be redeemed penalty-free after five years. Since bonds earn interest, they're usually considered a safe pick for infants and others. But, savings bonds don't have potential to appreciate the way other investments do. For example, a series EE savings bond has a fixed interest rate and is expected to double in value over 20 years.
It's never too early to save for college, especially given the ever increasing cost of going to school. Anyone can open a 529 plan for a baby. If the baby doesn't end up going to college, you can change the name of the beneficiary on the plan or take the money yourself. If you pick the latter, you'll have to pay tax and a penalty on the earnings. All 50 states offer 529 plans, and you don't need to live in a state to participate in its plan.
A Coverdell Education Savings Account can be opened for anybody under 18. You can open the account at a brokerage, bank or mutual fund company. Like a 529 plan, the money must be used to pay for school or there will be fines and penalties. Unlike a 529, you can only contribute up to $2,000 per year to an ESA (as of 2012). If the child doesn't use all of the money by the time he's 30, he can transfer it to another account -- perhaps one for his own baby.
Buying stocks for a baby can be dicey. If you pick a company that goes bust, the baby won't get anything. The goal is to pick a stock that will increase in value of time, even if the increase isn't exponential. Ideally, the stock will pay dividends and will be likely to split over time. If it all works out, the single share you buy this year can turn into many shares by the time baby turns 18.
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