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TL;DR The four main types of investment accounts for kids include UTMA accounts, 529 plans, Custodial Roth IRAs, and Youth Investment Accounts. Choosing the right account can help reach different financial goals.
Setting up an investment account for your kid is a great way to save for the future and teach financial literacy.
What are the different types of accounts you can open for a child?
Which type of account is the best?
Learn about the different account types, and a few alternative ways to invest for your kids.
Create generational wealth for your kids and grandkids.
Up Ahead:
There are multiple types of investment account options for kids.
Some accounts let you invest for kids’ futures and some accounts are made for kids to invest in themselves.
Each account has different rules and tax benefits that help you reach various goals.
The following accounts are set up in the child's name or have the child as the official beneficiary.
529 plans are tax advantaged investment accounts for college and other education costs.
If you think your kid will go to college or a trade school and want to start saving for that goal, a 529 could be the account for you.
A 529 plan allows you to invest for K-12 tuition (tuition from kindergarten to the 12th grade), college and trade school in a tax-free way, similar to how retirement investment accounts work.
Specifically, assets in the account grow tax free, and you won’t have to pay capital gains taxes on your investment’s earnings if you use the investments to pay for school expenses.
Some 529 plans offer age-based managed portfolios that don’t require active management, making it even easier to invest with them.
If your kid has qualified earned income, you can set up and invest in a Custodial Roth IRA.
A custodial account is an account that is legally owned by the minor and actively managed by the adult custodian until the child becomes of age.
Roth IRAs can be used to set your kid up for retirement in a tax efficient way, plus they can use the funds in the account for college tuition or a first home purchase.
Contributions to Custodial Roth IRAs are made with after-tax dollars. Since children typically have low income and low tax rates, Roth IRAs make the best vehicle to save for their retirement.
Sometimes known simply as a custodial brokerage account, UTMA accounts are brokerage accounts, taxable investment accounts that let you invest for your child’s future, no strings attached.
UTMA accounts are legally owned by the child and managed by you, the adult, until the child is of age.
The age of adulthood for the child is between 18 and 25, depending on the state where the account is set up.
UTMA accounts are flexible and have no limitations on how to use the funds. They can help with saving for college, financial independence, or starting a business. It’s up to the kid to decide when becoming an adult.
However, these accounts are officially owned by the child and offer tax benefits.
The first $1,250 generated in unearned income through these accounts are tax-free. This can means hundreds of dollars per year in savings.
There are many brokerages that offer UTMA accounts.
The best UTMA accounts offer an easy to use investing experience, low fees, and investment options that fit your investment knowledge and strategy.
Kids on the older side can start learning by doing, and may already be making their own money.
Youth investment accounts are investment accounts made for kids and teens to invest themselves.
Investing apps for kids offer investing with training wheels on. Parent supervised investing is a great way to teach kids about investing.
Some of the best chores and allowance apps offer investing built in for kids, with parent approval for investments.
New youth investment accounts offer tools for parents to teach their kids about money and investments. Parents approve trades, learn and explore new investments with their kids, and kids can choose to purchase fractional shares that fit their budget.
There are other ways to invest for children's futures than to open accounts in their names.
Instead, parents can open accounts in their own name and earmark the funds for their kids.
Here are a few alternative accounts and investments you can do for your kids.
The simplest way to start investing for your kids is to set up a brokerage account of your own and invest there.
The account will be in your name, and you'll pay regular taxes on your gains.
Earmark the investments for your kids - know the account is set up for your child's future. Try not to use the funds for other goals.
This lets you keep control of the funds in the account, even when your kids grow up.
If you'd rather keep control, instead of giving access to a large sum of money to a 21 year old, this is the way to go.
You can set up an account with any major brokerage firm and start investing.
Giving and receiving monetary gifts is a great way to save more for your children's future.
Buying stocks for kids is easy if you are the child's parent, but can be tricky otherwise. Instead, consider giving financial gifts that encourage additional investing.
Greatest Gift's financial gifting platform makes it possible for family & friends to invest in your little one's financial future. You can choose goals and create a gifting page, letting people send gifts with a greater purpose for birthdays and holidays.
On top of gifts, Greatest Gift offers guides (much like this one!) to help parents on their financial parenting journey.
Investing in kid's financial literacy pays compound interest when they grow up to be financially successful adults.
Open a Roth IRA account for yourself and invest your after-tax earned income.
A Roth IRA account allows you to invest in the stock market with tax benefits.
You can withdraw your contributions at any point, without any taxes or penalties.
If you keep your earnings in the account until the age of 59.5, or use them for educational expenses, you won't have to pay any capital gains taxes.
You can use the Roth IRA to invest for your retirement and for your child's education at the same time.
Instead of investing money for your kids in the stock market, consider purchasing real estate assets for them.
Owning real estate properties can provide passive income for the future and is a popular way of building generational wealth.
When your kids are older, giving them a place to live is an amazing gift. They can later choose whether to live there or generate income and continue investing.
The easiest way to save money for kids these days is with a high yield savings account.
In comparison to regular savings accounts, HYSAs pay out a high interest rate on your savings.
Some banks, like Capital One, offer a kid's savings accounts, but they don't often pay the best interest on savings.
Instead, consider opening your own savings account for your child at a bank that has a higher earning potential, and earmark the savings.
Ally Bank lets you open a custodial savings account, or you can simply open an account in your name and earmark funds for your kids with different savings "buckets".
Choosing the right type of investment account depends on the financial goals you set for your kid.
For example, if you are saving for college, consider a 529 plan. If you want to teach your child about investing, open a Youth Investment Account. If you want to build a safety net and invest for your baby's retirement, open a custodial Roth IRA.
There are a few ways to open an investment account for your child.
These include accounts that you open in your name and earmark for your child, accounts that you open as a custodian with your child as the beneficiary, and accounts that you open in their name.
In most cases, you can only open an account in your child's name when they reach the age of majority.
The most common way to set up an investment account for your kid is to open a custodial investment account. 529 plans, UTMA accounts, and custodial Roth IRAs are account types.
The sooner you start building your child's wealth, the more time you have for compound interest to work its magic.
Start by building up your own wealth - save more than you spend, invest the difference.
Learn more ways to build generational wealth.
Learn about different ways to manage money and invest, and teach your children financial literacy.
Once you decide on an account type to invest for your kids, you can get started.
Choose a brokerage that you trust and set up the account
Deposit funds, and start buying stocks for kids.
Teach your kids how to invest themselves.
Learn more about investing for kids.
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