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How To Open An Investment Account For a Child in 2021

Written by Banks Editorial Team

Updated September 18, 2023​

3 min. read​

It is never too early for your child to begin establishing their financial independence, and an investment account for children is an excellent way to get them started. Although an underage person cannot open an investment account on their own, a parent or guardian can help establish and maintain an account for children to invest money. Not only does an investment account provide a greater opportunity for long-term financial returns, but it also helps teach children about using money, establishing and maintaining savings accounts, and implementing the principles of investment. 

How to Open a Children’s Investing Account

2020 was an unusual year in many ways, both in the financial market and beyond. Despite market fluctuations and periods of economic uncertainty, the market has proven resilient over time, and long-term investment is not only viable but recommended. Fortunately, there are several good investment accounts for children in 2021. Simply follow the steps below to find and open the right investing account for your children. 

Step 1: Choose an Account Type

Investment accounts for children are divided into two categories: custodial accounts and individual retirement accounts (IRAs). The type of investment account you can open for a child is mainly based on the kind of income they plan to invest.

Traditional and Roth IRAs

If the child receives taxable earned income and has filed taxes for at least one year, they can open an IRA account in their own name with the assistance of their parent or guardian. A parent or guardian cannot open an IRA in the child’s name before they begin earning taxable income. A traditional IRA account allows your child to deposit their income tax-free and pay taxes when they withdraw the money later for college, a down payment on a home, or retirement funds. Roth IRAs, on the other hand, pay taxes on the income when it is deposited into the account, so it can be withdrawn at a later date by the child without the need to pay taxes on it at the time of withdrawal. Since both types of IRA allow the account’s income to accrue interest tax-free, the Roth IRA offers the best long-term investment value.

Custodial UGMA and UTMA Accounts

There are two types of custodial accounts for children who do not receive taxable income in accordance with the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). The difference between these account types varies depending on the state in which the account is opened. In general, UGMA accounts are more limited regarding contributions. They can only be used for cash, stocks, mutual funds, and insurance policies, while UTMA accounts can also include physical assets such as real estate, artwork, and intellectual property. 

As with an IRA, the child owns the account’s contents, but anyone can contribute to the account. Decision-making processes about investment and withdrawals are the responsibility of the custodian of the account, but any tax liability from withdrawals or capital gains will fall on the child. In this way, a custodial account differs from a guardian account, in which the custodian or guardian of the child would be liable for the taxes. 

Step 2: Select a Good Broker

Finding the right broker for your child’s investment account can make all the difference in your child’s investing experience. While the financial sector offers a variety of brokerage accounts, it is important to tailor your selection to your child’s particular needs.

Fees and Balance Requirements

As with any investment, it is important to find an option that will cost as little as possible. Select a broker that doesn’t charge fees, and check for accounts that do not require a minimum deposit or balance, so your child has the option to invest as much or as little as they like. 

Service Costs and Interest Rates

Depending on the type of investment, you should review the fees and commissions associated with the account. For children who intend to work closely with their investments and learn about stock trading, a broker with low trade commissions and educational material on investing would be ideal. On the other hand, if your child is simply looking for a place to put their money with minimal hands-on trading, they may be better suited to an index fund with low associated costs.

Step 3: Open Your Children’s Investment Account

Once you have selected the right account type and broker for your child’s investing account, you can usually open the account quickly online with minimal fuss. Keep in mind that with any bank account, you will be required to provide identification information for both the child and the account custodian, including dates of birth, social security number, employment details, and contact info. Depending on how you intend to fund the account, you will also need to provide the routing and account number of the account you plan to transfer the funds.

Long-Term Investments Pay Off

Whether you are looking to open a custodial account to teach your child about the ins and outs of investing, or you just need a stable IRA to store your child’s income and assets safely, there are a wide variety of investment accounts available. Don’t let the cyclical ups and downs of the 2021 market deter you. The stock market is resilient, and long-term investments tend to trend upward as the cycle continues, so the longer an investment sits, the more likely it is to provide a positive return. Ultimately, starting your child’s custodial or IRA account will not only help them save for large investments later in life, but it will also teach them important lessons about savings and financial management. 

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