11-Year-Old Aspiring Investor Asks: Roth IRA Or UGMA? Suze Orman Weighs In

Teaching children about money management early can be a powerful tool in setting them up for financial success. On a recent episode of the Women & Money Podcast, Suze Orman answered a question from an 11-year-old, Hazel, asking about how she should invest her monthly allowance. 

Hazel explained that she earns $24 a month doing chores and is planning to start babysitting soon to earn even more. She said she already has $4,000 in a savings account and that her parents want her to open a custodial Roth IRA. 

"I don’t want to open a custodial Roth IRA because I want to be able to use the money when I’m younger and invest in a house," Hazel wrote. "What do you think?"

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Orman applauded Hazel for her foresight and ambition and offered some advice tailored to Hazel's situation. "Yeah, you could put that into a Roth IRA like your parents want you to," Orman stated. "However, I like your idea. I have to tell you, I would open up a Uniform Gift to Minors Act account."

Opening a UGMA account would allow Hazel, with her parents' help, to invest her earnings in stocks or exchange-traded funds (ETFs) through platforms like Fidelity or Schwab. The key advantage? Hazel would have access to the funds once she reaches adulthood, enabling her to use them for significant milestones like buying a house. 

Orman also recommended that Hazel invest her $24 monthly income consistently, emphasizing the value of starting small but staying consistent.

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Let's breakdown UGMA accounts versus custodial Roth IRAs a bit further. 

A UGMA account is a custodial account that allows minors to own securities and other assets under the management of a parent or guardian. Once the child reaches the age of majority (18 or 21, depending on the state), the assets become fully theirs to use as they see fit. UGMA accounts do not have the same tax advantages as Roth IRAs but offer greater flexibility for accessing funds before retirement.

A custodial Roth IRA is a retirement savings account for minors who earn income. Contributions grow tax-free and withdrawals in retirement are also tax-free. While the child would gain control of the account once they reach adulthood, the funds in a Roth IRA are generally inaccessible before age 59½ without incurring taxes and penalties, except in specific circumstances like buying a first home.

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Hazel's question highlights a broader lesson of teaching financial literacy at a young age. A Schwab survey reports that Americans rank money management as the most crucial skill parents should teach their children. Orman has frequently said that conversations about money should start early and that parents should talk to their children about budgeting, savings and long-term planning. 

One piece of advice Orman wrote in her blog was not to shield children from finances. "Don't assume they will pick things up on their own or that it is being taught in school," she wrote. 

By empowering children like Hazel with knowledge and the tools to make informed financial decisions, parents can help build a strong foundation for their future success and independence.

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