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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 for your money to grow — and kids have a lot of time on their side. 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. Seeing their money grow can encourage them to be good savers and investors as adults.
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. Brokerage accounts for children are often referred to as custodial accounts. They're labeled as UGMA/UTMA accounts depending on the type of account restrictions.
» 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 automatically take full control of it once they reach 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 from a part-time job, such as babysitting, raking leaves, or something similar, 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 portion can be used for retirement, or tapped for special purposes such as a first-home purchase or higher education expenses. (Here's a full run-down on Roth IRAs for kids.)
If your child has a disability: An attainable savings plan (ABLE) account is a type of 529A account that allows a person with a disability to save money and wages without losing public benefits. Family and friends may contribute, and contributions grow tax-free. Unlike custodial accounts, an ABLE account is owned by the person with a disability. The money may be used for a wide range of qualified expenses from housing to transportation or education.
If saving for your child’s education is the goal: A 529 savings and investing account is a tax-advantaged account for education expenses. Investments grow tax free and can be withdrawn for qualified expenses like textbooks, tuition and room and board.
Brokerages are also creating new account types geared specifically for teens. Fidelity, for example, offers a Youth Account, which lets teens aged 13 to 17 control the account, but lets parents monitor its activity, trades and transactions, complete with alerts. This is a new type of youth investment account separate from the custodial accounts outlined above.
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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 that offers custodial accounts. 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.
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, consider looking 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, you might consider 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 a brand kids recognize will get them excited about investing.
» Learn more: How to invest in stocks
2. Build the rest of the portfolio with index funds. As your child continues to add money to the investment account, consider skipping additional shares of individual stocks, and instead focus 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 for one price.
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 weeks and comparing the small fluctuations with the larger long-term changes shown on their quarterly statements. This can spark discussion and inspire kids to become more informed investors.
Investing for teens
If your teen is asking about investing, a custodial account 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.
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