You don’t have to wait until your children are adults to teach them how to invest. It’s possible to start now to learn the ropes while they’re young and allow compounding interest to work in their favor.
Even better, you don’t have to do it all on your own. There are reputable platforms that offer custodial brokerage accounts, along with educational resources to help you get started and maximize your contributions.
Investment Apps and Trading Platforms
Steps to Start Investing For Your Kids
Below is a step-by-step process that makes it easy to get started:
1. Decide the Type of Investment Account for Kids You Want to Open
There are a few options to choose from. However, the best selection will depend on if your child currently earns income.
If they do, a custodial Roth IRA could be a good fit. Contributions are made post-tax, but you won’t be subject to taxation on the earnings. Plus, contributions can be withdrawn at any time without penalty. But any earnings on the contributions must remain in the account until retirement age unless a withdrawal is made to fund the cost of your child’s education or to make a down payment on a first-home.
But if your child doesn’t yet earn income, a custodial brokerage account is worth considering. There are two types to choose from – the Uniform Transfers to Minor Act (UTMA) account and the Uniform Gift to Minors Act (UGMA) account. More on these shortly.
2. Find a Provider that Offers an Investment Account for Kids
You’ll need a brokerage account to open an investment account for your children. Consider options, like UNest, that offer accounts for children, minus the steep account maintenance fees and opening deposit requirements. Also, be mindful of trading commissions as some brokerages assess hefty rates that could add up quickly if your child plans to initiate several trades.
It’s equally important that the brokerage provides educational resources and tools to teach your child all about investing. Paper trading opportunities, which allow you to simulate real-life trades, are also a plus.
3. Open the Account
Once you’ve selected a brokerage, it’s time to open an account. Whether you plan to go with a custodial account or Roth IRA, the broker will likely request the following:
- You and your child’s name
- You and your child’s date of birth
- You and your child’s Social Security number
- Your contact information
- Your banking information (for account transfers)
In most instances, the process is seamless and only takes a few minutes of your time.
4. Guide your Children with Their Investments
Your children are free to invest how they see fit. However, you should encourage them to adopt a logical method to invest and grow their money.
Start with a few index funds to diversify the portfolio and minimize risk. Also, consider letting your child select a few companies they like and would like to invest in to make the process fun for them.
Investment Apps and Trading Platforms
Types of Savings and Investing Accounts for Kids
Custodial Accounts (UGMA and UTMA)
UTMA accounts can be used to house almost any type of asset. However, you can only use a UGMA account to hold securities, annuities and cash.
Annual contributions are limited to $30,000. However, there’s no cap on how much you can contribute over time.
The custodial brokerage account belongs to the child, but the parent manages it until the child is 18 or reaches the age of majority in their state. At that point, they can take ownership of the account, and there are no restrictions on how they can use the funds.
A 529 plan is a state-sponsored investment vehicle parents commonly use to save for their child’s education.
You can choose from these options:
- Education savings plan: You can use this plan to save for most college-related expenses.
- Prepaid tuition plan: You can use this plan to save for college tuition and lock in today’s rate.
Annual contributions are made post-tax, and capped at $30,000 (married couples) or $15,000 (singles).
You’ll retain ownership of the account until your child reaches 18 years of age or the age of majority in your respective state. When the child takes over, the funds in the account must be used on education costs or transferred to a sibling to avoid taxation and penalties.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts (ESA) allow parents to contribute up to $2,000 post-tax annually. Your child can use the funds to pay for qualifying educational expenses without paying taxes. But suppose your child has not exhausted the funds for education-related costs by the age of 30. In that case, the account can be transferred to a relative and retain the tax benefits.
Traditional and Roth IRAs for Kids
As mentioned earlier, custodial IRAs can help your child learn more about investments and how they work. You can choose from a traditional or Roth IRA.
With a traditional IRA, you’ll make pre-tax contributions and pay taxes when you begin taking distributions (as early as age 59 ½ but no later than 72). However, Roth IRA contributions are post-tax, and you can take tax-free distributions starting at 59 ½. But both allow you to make withdrawals before this point to pay for qualifying higher education expenses.
What Common Investment Assets Can Kids Invest In?
Stocks can help children grow their money by investing in their favorite household brands for years to come. You can purchase individual shares or invest in stock through a mutual fund or ETF.
Exchanged-Traded Funds (EFTs)
ETFs consist of an assortment of stocks, bonds and other assets. They allow you to diversify your holdings, are sometimes industry-specific, and are traded on stock exchanges.
Mutual funds are another investment vehicle that pools your assets with funds from other investors to create a portfolio of stocks, bonds and other assets.