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How to Open an Investment Account For Kids

Written by Banks Editorial Team

Updated September 18, 2023​

3 min. read​

It’s never too early to begin investing in your child’s future, and investment accounts for kids may be an excellent way to get started. Investing requires plenty of time to allow for a larger return, which means that the sooner you create an investment account for your child, the more money they will ultimately receive. Letting your child help manage their investment account and watch their savings grow is also an excellent way to begin teaching them to be money smart.

Types of Investment Accounts for Kids

There are several types of investment accounts for kids that you can choose from, depending on your needs and goals. Let’s review them.

Custodial Brokerage Account

When choosing how to begin investing for your kids, it is important to determine whether they have taxable income or wages. If they do not, you may open a custodial brokerage account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). This account will be in your name until your child reaches the age of majority, which may be either 18 or 21, depending on location. Once your child gains access to this money, they will be able to use it however they like—it is not restricted to college tuition.

Both UGMA and UTMA brokerage accounts allow you to invest in mutual funds, stocks, bonds, and cash. However, UTMAs also will enable you to invest in real estate. It is important to note that not all states allow both UGMAs and UTMAs—speaking with a broker will help you determine which type of custodial brokerage account will be best for you and your child.

Custodial IRA

While custodial brokerage accounts are ideal for kids with no income, kids who earn an income are eligible for a custodial IRA. This income can come from any job, including things like tutoring or babysitting. As long as their income is high enough to be reported to the IRS, you can open a custodial IRA for your child.

IRAs are tax-advantaged retirement accounts, and they differ from brokerage accounts in that there are typically restrictions around when your child can withdraw their money. A Roth IRA does allow you to withdraw contributions without receiving an early withdrawal penalty, but you will be unable to withdraw investment earnings freely.

Educational Accounts

Educational accounts typically fall under the 529 savings plan, which may vary from state to state. However, regardless of where you are when you open a 529, your child will generally be able to use the money to pay tuition at eligible schools across the country. Although contributions to this type of educational account are not tax-deductible, certain distributions are tax-free. 

529s are also advantageous because anyone can make a gift to the account, regardless of whether they are a relative. It is also possible for you to name anyone as a beneficiary, with the caveat that the money must be used exclusively for educational costs.

Reasons to Open an Investment Account for Your Kids

Opening an investment account early means it will have plenty of time to grow before your children reach adulthood. However, this is just one advantage of setting up an investment account for your kids — there are many additional reasons you might choose to make this decision.

1. Saving is Cheaper Than Loans

There are numerous expenses in your child’s future that you can plan for years before they happen. College tuition, cars, a house, and even a wedding all create significant costs that your child will need to pay. While loans are an option, they can end up steadily accruing interest and saddling your child with debt.

However, getting your kids set up with some savings account during childhood means that they already have the advantage of financial stability when they reach adulthood. Rather than taking out loans that they will then have to spend years paying off, they will be able to utilize the money that you invested during their childhood, and that has been accruing interest for years. This means that savings—which grow over time—are significantly cheaper than loans, which become more expensive over time.

2. Tax Advantages

Tax-advantaged accounts offer more than just interest: They provide significant tax benefits that can save you additional money over the years. Parents can receive a tax benefit of up to $2,200 annually. Additionally, you will not have to pay taxes on the first $1,100 the account earns. Opting for tax-advantaged accounts like this will ultimately increase your savings, resulting in more funds for your child in the future.

3. Investing for All Levels

Whether your child is still a toddler or has grown up enough to have their first job, there are investment options to suit their needs. Even if they are too young to make significant financial decisions, teaching your child about sound investment strategies and letting them watch their money grow over time teaches valuable financial skills that will last a lifetime.

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