Investing for Kids: How to Open a Brokerage Account for Your Child

Investing is for kids, too — and it's never too early to start. You can open a custodial brokerage account for your children and help them select investments.
Arielle O'SheaSep 13, 2021
For Kids' Allowance, No Cash Required

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Investing isn't just for adults: If you want to teach your kids some valuable lessons about money and the power of investment growth, helping them open a custodial brokerage account can be a great start.

Investing for kids

One of the biggest keys to successful investing is a long time horizon, and kids have that in spades. If they're willing to let their money remain invested for several years, they're likely to see a nice return on their initial investment. Watching their money grow can encourage them to be better savers and investors as adults, when it truly matters.

Here are some things to consider about investing for kids, including which investments are best and how to select and set up your child’s first brokerage account. And to clear up any confusion, you'll often see this type of account referred to as a custodial account or a UGMA/UTMA account, too.

» Ready to get started? See our list of the best custodial accounts

Decide on an account type

To get your kids started investing, you should first decide which investment account is best for them. That decision largely hinges on whether they have earned income.

  • If your child doesn't have taxable income or wages: Under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act (UGMA/UTMA), you can open up custodial brokerage accounts for your kids. Although the account will initially be in your name, your child will be able to take full control of it once he or she reaches age 18 or 21, depending on state laws. (Learn more about UTMA and UGMA accounts).

  • If your child has taxable income or wages: If your children are older and have earned income, you can help them open a custodial IRA. A Roth IRA in particular is ideal for children: The contributions your child makes to the account will grow tax-free. Those contributions can be pulled out at any time, and the investment growth can be tapped for retirement, but also for a first-home purchase and education. (Here's a full run-down on Roth IRAs for kids.)

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Choose the right broker

No matter which type of brokerage account you decide to open for your kids, you'll need to start by finding a broker. The best investment accounts for kids charge no account fees and have no minimum initial deposit. This gives your kids the chance to start investing with a small amount of money.

Look for an online broker with no account fees or investment minimum.

Consider, too, the costs associated with the investments your child plans to choose. For example, for kids who want to practice trading stocks, you should ensure the broker charges low or no trade commissions. If your kids just want their money to grow in a hands-off way, look for brokers with a large selection of low-cost index funds.

If you’re looking for a brokerage account to teach your kids about investing, know that many brokers offer educational content, including online investing tutorials and even practice trading accounts.

Open the account

You can open a custodial account — both a standard brokerage account and a Roth IRA — for your child in under 15 minutes or so; at most brokers, the entire process is completed online.

To speed things up, make sure you have the necessary information ready. The broker will likely ask for both your and your child's Social Security number, as well as dates of birth and contact information. You'll probably have to supply your employment information, and you should be ready to link another bank or brokerage account so you can transfer money to fund the new account.

Help your kid decide what to invest in

Once the custodial account is open and funded, the real fun begins: Investing the money.

Within their brokerage account, your kids will be able to invest in individual stocks, as well as mutual funds, index funds and exchange-traded funds.

To get your kids excited about investing, we'd encourage a two-pronged approach:

1. Help them pick one or two individual stocks. Focus on household names they're familiar with — owning even one share of popular brands kids recognize will get them excited about investing.

2. Build the rest of the portfolio with index funds. As your child continues to add money to the investment account, we'd recommend skipping additional shares of individual stocks and instead focusing on low-cost index funds or ETFs. These funds bring much-needed diversification to the portfolio, by pooling hundreds of stocks together into one investment. That way, your child can invest in a lot of different companies in one transaction.

To learn more about the investments your child will be able to choose from — and to decide which is most suitable — read our full guide to various types of investments.

Once they've selected and purchased their investments, make a habit of checking their earnings and losses every few days and comparing the small fluctuations to larger long-term changes. This will spark discussion and inspire kids to become more informed investors in the future.

Investing for teens

If your teen is asking about investing, a custodial is still going to be your best place to start. The age requirement to open a brokerage account with the most popular investment apps is 18 (and sometimes older, depending on the state.) So until then, you have the final say in how they invest, and where.

However, some of the investment apps that are most popular with younger generations (such as Robinhood and Webull) don’t offer custodial accounts. So you’ll want to do your research alongside your teen, explaining that if they want to start investing before the age of 18, they’ll have to do it through an institution that offers custodial accounts. Once they’re of age, they can decide if they want to continue with the same brokerage service, or open their

own. This can also be a time to explain the benefits of opening multiple investment accounts for various purposes.

Frequently asked questions

To start investing in stocks on their own, your kid will need a brokerage account, and they must be at least 18 years old to open one. They can start earlier than this, but they’ll need a parent or guardian to open a custodial account for them.

A custodial account is a type of investment account that’s managed by a parent or guardian who opens it for a minor before the age of 18 (or 21, depending on the state.) Once the child turns the age of majority, the parent or guardian loses the ability to manage the account.

If you’re withdrawing money from the custodial account, it must be used for the benefit of the minor — no raiding the account to pay for your own expenses. Also, contributing to the custodial account is a one-way street; you can’t take back any assets held in the custodial account once you’ve given them to the minor. The account and its assets belong to the child in every way, even if you’re the one managing it.

Considering the account belongs to the minor, technically, they’re the minor’s taxes to pay. However, in general, the first $1,100 of unearned income (such as dividends, interest or earnings from the account) is tax-free. After that, the next $1,100 of unearned income is taxed at the child’s rate. Once the minor’s unearned income rises above $2,200, it will be taxed at the parents’ tax rate.

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