Whether you’ve got a newborn baby, or a working teenager, there are a handful of options to open investing accounts for kids.
Some accounts have tax advantages, others don’t. But in any scenario, getting started investing early in life is the real advantage. It’ll give your kid a financial leg-up, even if you only start with a few bucks!
In this post we’ll review all the account options for minors, how they work, and resources to get you started.
Best Investing Accounts for Kids
Here is a summary of the accounts we’ll be reviewing:
- Roth IRA for minors (best for kids with earned income)
- 529 Plans (best for education expenses)
- Custodial brokerage (best for monetary gifts to minors)
- Youth Brokerage Account (an option for teaching teens DIY investing)
Picking the right account typically comes down to how you envision the money being spent later in life. You may even consider opening up multiple different account types in order to take advantage of the diverse range of perks.
Roth IRA for Minors 🏆
Yep, kids can open Roth IRAs. And they can be opened at any age!
But, the catch is that they must have *earned income.* You won’t be able to contribute more to the Roth IRA in a given year than what that child earned. You’ll definitely want this to be well documented because after compounding and growing tax free into millions of dollars over decades, the IRS might come knocking later in life. 😬
Roth IRAs for kids are pretty much identical to adult Roth IRAs. The only real difference is that you will act as the account “custodian” until the child becomes a legal adult. The account is opened and held in their name, but you (or whoever the appointed custodian is) makes the investment decisions inside the account.
Overview of Custodial Roth IRA:
- Subject to Roth contribution limits each year ($6,500 in 2023)
- Account grows tax free, forever
- Contributions can be withdrawn at any time, penalty free
- Growth & dividends can be withdrawn tax free after age 59½ (before then, there’s a 10% penalty + income tax due on any early withdrawals.
Roth IRA’s for kids can be opened at most large brokerage firms. We love Fidelity and Vanguard, particularly because they offer some of the best low-cost index fund options. They don’t levy any opening or account fees and don’t charge trading fees either. So once you open up an account, you can sit back and relax knowing that the money inside of that Roth is growing as efficiently as possible.
All in all, if your child or teenager earns income, a Roth is an awesome investment account for long term tax-free growth!
529 Plans 👩🎓
529 Plans are tax advantaged accounts specifically designed to cover future education expenses (either college or K-12).
There are two types of 529 plans… The most common is a standard savings plan where contributions grow tax free and can be taken out anytime to cover tuition, room & board, text books, etc. The other type is a prepaid tuition plan where you can lock in today’s rate for future tuition at eligible public or private colleges. (only some states offer this!)
Similar to the Roth IRA, you can withdrawl contributions at any time from a 529 plan. But, any growth from the account is subject to income tax + a 10% penalty if you use the money for anything other than education expenses. This is one of the reasons a 529 might not be a great fit for all kids. College can be overrated, and the future of higher education, along with the costs of getting that degree, are hard to predict.
That being said, there are a few ways to get around penalties if you’ve accidentally overfunded a 529 plan. First, you can change the account beneficiary to a different family member (here’s a list of who the IRS counts as eligible fam members).
The other option allows you to roll over the money to the beneficiary’s Roth IRA. This is a relatively new rule, released in 2022, so some of the finer details are still being shaken out. But this one change has made 529 plans much more enticing than they were just a couple of years ago. This additional flexibility makes 529 plans a smart first place to turn if you want to invest money for your kids.
Overview of 529 Plans:
- Designed for education expenses
- Tax free growth of contributions
- Can change the beneficiaries!
- Rollover to Roth option (up to $35k)
Each US state runs their own 529 plan, and there are multiple firms that you can open an account with. We recommend researching your options thoroughly and specifically paying attention to fees! Here is an excellent resource to help find a good place to open a 529, depending on the state you live in.
Custodial Brokerage 🏛
Also known as UTMA or UGMA accounts… These are basically regular brokerage accounts, held under the kids name with an adult as the custodian.
**Before we go further, it’s important to note that custodial brokerage and bank accounts in a child’s name may affect financial aid applications later in life. Before gifting large amounts of money to children, you’ll want to understand their potential eligibility for FAFSA and how it may be impacted**
As a custodian, you are responsible for managing the account until the kid turns legal age. At that point, the account turns into a regular brokerage account in their name where they are in full control.
There aren’t any tax advantages for accounts like this. But, they are probably the most flexible as the kid is free to do whatever they want with the money/account when they have access to it. Also the account can be funded with gifts, earned income, and there are no contribution limits to worry about. (Although you might want to read up on gift taxes, if you’re giving large sums to kids).
Custodial Brokerage overview:
- No tax advantages
- Anyone can fund or gift money into the account
- No contribution limits
- Any legal adult can be the custodian (doesn’t have to be parents)
Brokerage accounts for kids can be opened at any age, and are available at most of the main financial firms. Just like the Roth IRA, we love Fidelity and Vanguard for custodial accounts.
Youth Brokerage Account 👨💻
A few large brokers have begun launching investing accounts for kids that can be fully controlled by a teenager. For example, Fidelity offers a Youth Account designed for 13 – 17year olds, which allows them to save and invest independently.
There is still some parental oversight with these accounts. And in the case of Fidelity, the parent or guardian must also be a Fidelity account holder for their child to be eligible for a Youth Account.
Independence is important for older teenages. But, it’s still really important for parents to monitor activity and help teach kids about investing responsibly. Fidelity restricts youth account from investing in some types of assets (like crypto or REITS), and they have a number of educational resources to guide and advise kids.
Youth Brokerage Overview:
- Only some brokerages offer
- Limited investment options (restricts risky investments like crypto)
- Connected to parents account
- Allows child to make trading decisions
Again, we’d like to stress the importance of teaching kids how to be responsible when investing. The sooner they learn the right financial habits, the easier it will be to grow wealth throughout their life.
Setting Your Kids Up for Financial Success
Nobody wants their kids to struggle financially. So it’s tempting to think about giving your kids as much money as possible while younger so it can grow to become a large sum later in life.
But the problem with giving kids large amounts of cash is that it may hinder their ability to make and grow their own money. We’re not saying that monetary gifts are bad for kids. It’s just that teaching kids how to solve their own financial problems in life trumps you solving problems for them. If you make things too easy for them financially, it can backfire.
Educating your kids about money early is important. Children as old as 2-3 can learn the concepts of working, earning, saving and even investing! Here’s a great podcast episode on raising financially savvy kids you may like.
Lastly, children learn the absolute best when they have a solid example to follow. Parents are a child’s biggest influence when it comes to learning smart money management habits. So it’s important to have your own financial bases covered and practice healthy money habits for your kids to adopt the same.
The Bottom Line:
There are a handful of options when it comes to investing accounts for kids. Choosing the right one for your family situation comes down to what the money will be used for later in life, and whether the child is earning income.
While 529 accounts are popular for college savings, it’s important to know about the other investing options as kids start to earn and save their own money. Regardless of which account you choose, congratulations on helping your youngin’s start investing early in life. It’s a skill set that pays dividends (figuratively and literally!).
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