Best Investment Accounts for Kids

Your children’s future starts today. According to research published by the Wharton School of the University of Pennsylvania, 57% of older Americans regret not saving more for retirement. Parents can help their children develop sound financial habits, including smart investing. 

This article will provide you with tips on setting up investment accounts for kids. 

Quick Look at the Best Investment Accounts for Kids:

• Savings Accounts
• UGMA and UTMA Custodial Accounts
• Coverdell Education Savings Accounts
• Education Savings Accounts (ESA)
• Custodial Roth IRA
• Brokerage Account

6 Best Investment Accounts for Kids

There are several different account types parents can choose from. Here are the best investment accounts for kids. 

1. Savings Accounts

A traditional savings account is one of the simplest ways to teach children about money management. And some savings accounts, such as a certificate of deposit (CD) or money market account (MMA), offer the potential to earn money through interest.

Minors can’t open a savings account on their own, but parents can open a joint account or custodial account. The minor will still serve as the account owner, but kids are limited to deposits or withdrawals of a certain amount. 

2. UGMA and UTMA Custodial Accounts

Accounts created as a result of the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are custodial accounts. An adult — usually a parent — serves as the account owner or custodian. The custodian can contribute funds to the account until the minor turns either 18 or 21, depending on the state.

The main difference between UGMA and UTMA accounts is the type of assets they contain. A UGMA contains financial products such as stocks, bonds or mutual funds, while a UTMA can also contain physical assets such as collectibles, art or real estate. 

3. Coverdell Education Savings Accounts

A Coverdell education savings account (ESAs) is a specialized type of custodial account used exclusively for educational purposes. The ESA must be designated as a Coverdell account at the time it’s created, and the beneficiary must be younger than 18. Contributions must be made in cash, and they are not tax deductible. There’s also a contribution limit of $2,000 per year until the beneficiary reaches 18.

A Coverdell ESA offers tax benefits when the funds are distributed as long as the funds don’t exceed the beneficiary’s education expenses. Any remaining funds must be distributed to the beneficiary within 30 days following their 30th birthday.

4. Education Savings Accounts (ESA)

Education savings accounts (ESAs) are unique options available in only 13 states. An ESA allows parents in those states to withdraw their kids from a public or charter school. In return, they’ll receive a deposit into a government-authorized savings account. They can then use this money to fund education expenses such as private education, tutoring and more. They can also be used as a college savings plan.

To qualify, you must live in one of the approved states. But if you qualify, the funds can be used for a variety of educational purposes, so this might be another way to help kids plan for their educational future.

5. Custodial Roth IRA

A Roth IRA is a tax-advantaged individual retirement account. The money you contribute to the Roth IRA will grow tax-free, with no tax paid on distributions. A custodial Roth IRA works the same way. The minor is the account owner, but the custodian manages the account until the beneficiary reaches legal adulthood.

There is no age limit, but the child must have earned income to contribute. Summer jobs like babysitting or mowing the lawn can count, and parents can make matching contributions, though the standard contribution limit of $6,500 still applies.

6. Brokerage Account

Legally, minors are not allowed to buy or sell stocks. But parents may open a brokerage account on their behalf. A custodial brokerage account will be managed by the custodian, but the idea is that children can make decisions about what to invest in.

The exact terms and conditions vary by the broker, but generally, you can expect to select from individual stocks as well as baskets of stocks such as mutual funds, index funds or exchange-traded funds (ETFs).

Benefits of Investing for Kids

It’s never too early to develop financial literacy. Investment accounts for kids provide a valuable learning opportunity and give the next generation a strong foundation for their future. Here are just some of the benefits that kids receive from opening an investment account:

• Introduction to the concept of investing for kids: An investment account will teach your kids the basics of investing and how to build long-term wealth.
• Long-term financial security for children: Investing today can benefit your kids tomorrow. Your kids can tap into their investment account for education expenses, their first car or a house. They can even start saving for retirement.
• Teaching valuable money management skills: Kids will also learn how to manage their money by setting a budget and planning their investment contributions carefully.
• Instilling discipline and patience at an early age: Nothing destroys your financial future like the demand for instant gratification. Starting an investment account can help your kids learn to be disciplined when it comes to saving.

Additionally, parents and family members will improve their own financial habits by guiding their children in this journey.

Tips for Maximizing Returns in a Child’s Investment Account

Ultimately, parents have the most control over their children’s investment accounts. But that also means that parents have the responsibility to show their kids how to maximize their investments. Here are some tips for getting the most from investment accounts for kids.

Start Early and Contribute Regularly

Money grows over time, so the sooner you start putting money into a savings or investment account, the more you can benefit from interest rates or the rate of return. And by making regular contributions, you’ll build your investments over time and teach yourself to make your savings a priority.

Diversify Investments

Investment always comes with a degree of risk. But you can protect yourself against risk through diversification. Diversification can come from selecting multiple stocks from different sectors/industries such as healthcare, technology and finance. You can also diversify across asset classes, meaning you invest in stocks, bonds and tangible assets like precious metals or real estate.

Discuss the Importance of Long-Term Investing

Investing is a marathon, not a sprint. It’s important for kids to understand that the true payoff is long-term gains rather than immediate wealth. Some of the largest stocks, for example, provide steady, reliable returns, allowing you to build wealth over the course of many years. This makes them good for long-term plans such as home ownership or retirement.

Use Online Resources and Educational Materials

You’re already reading a great resource on finance. You might continue exploring online resources to educate yourself or to share with your kids as they develop their investing skills. You can use investing software to practice trading with paper trades or learn more about how to track and monitor your investments over time.

Establishing a Trajectory

Every parent wants the best for their kids. By teaching them sound financial skills, you’ll set the next generation up for a secure future — from college all the way through retirement. And who knows? You just might brush up on your own saving and investing skills along the way.

Frequently Asked Questions