As parents, teaching our children about financial responsibility is an essential life skill. Besides the importance of saving and budgeting, kids can benefit from learning about (and engaging in) investing from an early age. While it might seem like a daunting task, investing can teach children valuable lessons about long-term planning, risk management, and the power of compound interest. Investment accounts for kids are a great way to start, and there are several options to choose from. In this article, we’ll explore some of the different types of investment accounts for kids, the benefits of starting investing early, how to open an account, and some tips for teaching kids about investing. Whether you’re a seasoned investor or new to the concept, there’s something here for everyone. Let’s dive in!
Types of Investment Accounts for Kids
There are several types of investment accounts available for kids, depending on your needs and goals. Here are some of the most popular options:
UGMA/UTMA Accounts
- UGMA stands for Uniform Gifts to Minors Act, while UTMA stands for Uniform Transfers to Minors Act.
- These accounts are simple to set up and usually offer flexibility in terms of investments.
- However, they are irrevocable and the child gains control of the account when they reach the age of majority (usually 18 or 21).
- The funds in the account are considered the child’s assets and could potentially affect their eligibility for financial aid when it comes time for college.
Custodial Accounts
- Custodial accounts are similar to UGMA/UTMA accounts in terms of simplicity and flexibility.
- However, they can be set up with a wider range of financial institutions and can be used to invest in a variety of securities such as mutual funds, ETFs, and individual stocks.
- The custodian (usually a parent) manages the account until the child is of legal age, at which point the assets are transferred to the child.
- Custodial accounts are subject to the Kiddie Tax, which can limit the amount of tax-advantaged investments available.
Coverdell Education Savings Accounts (ESAs)
- These accounts are designed specifically for college savings and can be used to pay for qualified expenses such as tuition, books, and room and board.
- Investors can contribute up to $2,000 per year per child and contributions are made on an after-tax basis (meaning withdrawals are tax-free).
- ESAs offer a range of investment options, and the account can be transferred to another family member if the designated child does not use it.
What are the main types of investment accounts?
There are several types of investment accounts available to investors, including:
- Individual retirement accounts (IRAs), which are tax-advantaged accounts designed to help people save for retirement.
- 401(k)s, which are employer-sponsored retirement plans that allow you to save money through payroll deductions. Many employers offer matching contributions to encourage employees to participate.
- Brokerage accounts, which are a type of investment account that allows you to buy and sell stocks, bonds, and other securities.
- Mutual funds, which are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
- Exchange-traded funds (ETFs), which are similar to mutual funds, but are traded like stocks on an exchange.
If you are unsure which type of investment account is right for you, it may be helpful to consult with a financial advisor or use a robo-advisor service such as Betterment or Wealthfront.
Benefits of Investment Accounts for Kids
Starting investment accounts for kids early can have significant benefits in the long run. Here are some reasons why you should consider investing in an account for your child:
| Benefits of Investment Accounts for Kids |
|---|
| Teaches financial responsibility at a young age |
| Contributes to long-term savings goals |
| Allows for compounding interest |
| Teaches kids about the stock market and investing |
| Helps children learn to monitor and adjust their investments |
| Encourages an early start to investing for the future |
It’s important to start investing early in life in order to reap the benefits of compounding interest. When investment accounts are started early, the investor not only has more time to save, but also racks up more interest. For example, a $10,000 investment account started at age ten with an average return on investment of 8% would be worth $46,609 by the time the child turns 25, and $328,591 by the time they turn 65. Additionally, involving children in the process of investing teaches them about financial responsibility, amounting to good habits for their future.
Can you have an investment account for a child?
Yes, you can set up an investment account for a child. This can be a great way to help them save money for their future. Here are a few things to keep in mind:
- A custodial account is one option to consider. This type of account is set up and managed by an adult on behalf of a minor.
- A 529 plan is another option. These plans are specifically designed to help families save for education expenses.
- There are also some investment platforms and apps that offer options for minors. For example, Stockpile allows parents to set up custodial accounts for their children and purchase fractional shares of stock.
It’s important to do your research and choose the option that’s right for you and your child’s needs.
How to Open an Investment Account for Kids
Opening an investment account for a child is relatively simple. Here are some steps to get started:
Research and Choose the Right Investment Account
- Look for accounts with low fees and good investment options
- Consider the child’s age and investment goals when selecting the account
Open An Account
- Select a custodian or brokerage to open the account with
- Fill out and submit the necessary paperwork
- Deposit the initial funds into the account
Teach the Child About the Account
- Explain how the account works and its benefits
- Involve the child in the decision-making process
- Teach the child how to monitor and adjust their investments
It’s important to monitor the account on a regular basis and make adjustments as necessary. Encourage the child to learn about different types of investments and diversify their portfolio as they get older. There are several online investment platforms that cater to children, such as Stockpile and BusyKid, which offer hands-on experience with investing.
Should I open a custodial investment account for my child?
Yes, you should consider opening a custodial investment account for your child. Here are some reasons why:
- A custodial investment account allows you to invest in stocks, bonds, mutual funds or other assets on behalf of your child.
- The account allows for tax-free growth of investments until your child reaches adulthood and takes ownership of the account.
- You can use the account to teach your child about investing and financial responsibility at an early age.
- Many financial institutions offer custodial investment accounts with low or no fees.
Consider talking to a financial advisor or researching online to find the best custodial investment account for your child.
Some popular online brokerage firms that offer custodial investment accounts include:
Teaching Kids about Investing
It’s important to teach kids about investing early on so they can develop good financial habits. Here are some tips for teaching kids about investing:
Get Them Involved
- Involve kids in the decision-making process when choosing investments
- Show them how to monitor their account and track their progress
Make It Fun
- Use real-life examples and experiences to teach kids about investing
- Play games that teach financial concepts and help them identify good investments
Create a Diversified Portfolio
- Explain the importance of diversification and setting investment goals
- Show them how to select stocks or funds that align with their goals
Use Online Investment Platforms
- Consider using online investment platforms, such as Stockpile or BusyKid, that are designed for kids and offer hands-on experience with investing
- Show them how to manage their account and invest in the stock market through these platforms
Encourage kids to stay informed about the market and look for opportunities to invest in companies they believe in. Helping kids understand investing can provide them with valuable lessons they can use throughout their lives.
Why is Investing Good for Kids?
- Investing teaches financial responsibility and money management skills at an early age.
- It also instills the importance of saving for the future and long-term goals.
- Investing provides an opportunity for children to learn about the stock market and how businesses operate.
- Through investing, kids can potentially earn money and achieve financial independence in the future.
If you’re interested in teaching your child about investing, there are websites and products available that offer educational resources and tools. For example, Stockpile offers a platform where kids can invest in fractional shares of companies they love and follow along with their performance. And the book “The Kids’ Money Book: Earning, Saving, Spending, Investing, Donating” by Jamie Kyle McGillian provides a comprehensive guide for kids to learn about all aspects of personal finance, including investing.
Tax Implications of Investment Accounts for Kids
When choosing an investment account for a child, it’s important to consider the tax implications. Here are some things to keep in mind:
Custodial Accounts
- Income generated on a custodial account is taxed at the child’s rate, which may be lower than the parent’s rate
- Income over a certain amount may be subject to the “kiddie tax,” which taxes the child’s unearned income at the parent’s rate
Coverdell ESAs
- Contributions to a Coverdell ESA are not tax-deductible, but withdrawals for qualified education expenses are tax-free
- If the funds are not used for education, withdrawals are subject to income tax and a 10% penalty
UGMA/UTMA Accounts
- Income generated on a UGMA/UTMA account is taxed at the child’s rate, which may be lower than the parent’s rate
- Once the child reaches a certain age, they gain control of the account and may be subject to taxes on any gains or income
It’s important to keep track of any tax consequences and adjust investments as needed. Consulting with a tax professional can also be helpful in determining the best investment accounts for a child.
What is an investment for kids?
Investing for kids means putting money into an account or vehicle that will grow over time. This will help them build savings and teach them the importance of financial planning.
Some popular investments for kids include:
- Custodial savings accounts
- Stocks or mutual funds
- 529 college savings plans
It’s important to research and understand the different options available before making any investment decisions. Websites like Kidfund and Stockpile offer user-friendly platforms for parents to invest on behalf of their children.
Conclusion
Investment accounts for kids can be a great way to teach children about finances and investing while also helping them save money for the future. When choosing an investment account for a child, it’s important to consider the various types of accounts available, the tax implications, and how to involve the child in the process. By starting early and teaching kids about compound interest and the risks involved with investing, parents can help set their children up for a secure financial future.
Parents can research and choose the right investment accounts for their child by reviewing available accounts online or by talking with a financial advisor. The most important part of opening an investment account for a child is to involve them in the process and teach them about financial responsibility, investing, and the stock market.
In conclusion, opening an investment account for kids is a great opportunity for parents to teach their children about finances and investing, prepare them for the future, and set them on a path toward financial security.
