If you’re looking to set your child up for success in life, many parents look to start investing early for their kids. But what are investment accounts for kids? And how do they work?
What are investment accounts for kids?
A custodial account is a financial account in a minor’s name. An adult custodian manages the account, but the assets belong to the child. When the child comes of age, they can take full control of their account. You can open a custodial investment account for your kid that lets you, family, and friends make tax-advantaged gifts toward your kid’s financial future.
How to use custodial accounts for kids
You can use a custodial account just like any other brokerage account. As the custodian, you can invest money in the account to benefit your child later in life. Many parents use custodial accounts to help their kids pay for college, save up for a down payment, or build wealth from an early age.
An investment account for kids can be an excellent choice for parents and family members who want to make financial gifts to their children without giving them immediate access to the money. Kids' investment accounts can also create a tax-advantaged way to save for expenses you already plan on helping your child with later in life.
Types of investment accounts for kids
While all investment accounts for kids work similarly, there are many different types to consider depending on your financial situation. One factor to consider is whether your child earns income or wages. If your child doesn’t have taxable income, you can open a custodial account under the Uniform Transfer to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA).
If your child has taxable income, you can help them open a custodial retirement account like an IRA. A Roth IRA may be a great option for your child since contributions will grow tax-free. Those contributions can also be used later without penalty for a first-home purchase or college. It also provides a great way to show your kid the power of growing their money.
Some other investment account types to consider are:
- 529 Plans: These plans are a type of tax-advantaged investment account used to save money tax-free for your kid’s education.
- Prepaid Tuition Plans: Some states offer different plans to help parents save toward college for kids.
- Retirement Plans: An IRA, 401(k), or any other type of retirement account can help your child start saving and building long-term wealth from an early age.
Best investment account for your kid
The best investment account for your kid is the one that fits you and your child’s needs. What may work best for one family may not work best for you. Explore your options and get your kids involved in the process.
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