Investing For Kids: The Best Investment Accounts To Open Early

Key Takeaways


What is one thing you wish you learned in school growing up? For many people, the answer includes how to file taxes, buy a house, or manage money effectively. While these are crucial life skills, many individuals are left to teach themselves how to handle them. However, it does not have to be this way for the next generation.

With the right financial education, children can develop a strong sense of financial security and money management. That’s why investing for kids is such an important topic to share with your little ones. Keep reading to learn about the best ways to talk to kids about money and investing.

Why Is Investing For Kids Important?

There are several reasons why investing for kids is so important, but perhaps the most beneficial element is time. Children have the benefit of watching their money grow and increase in value throughout each stage of life. By investing early, you can help your children maximize their overall returns and build their savings over time.

Think about a basic savings account as an example. If you opened an account for your child at age 10, it would accrue interest throughout their childhood regardless of whether you keep contributing over time or not. If you started that same account for them at age 18, the account would lose out on those eight years of interest. The same can be applied to other investments.

Aside from appreciation over time, investing for kids can be a great way to build a strong financial understanding early in life. Investing can open up conversations about money in the home and teach children basic management skills. This can set them up for success throughout life as they develop their own financial habits and learn to buy, save, invest, and more.


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The Best Investment Accounts For Kids

With all of that being said, some investment accounts are better for kids than others. Parents need to take growth potential, management responsibility, and risk into account before choosing the right investment opportunity. The following list considers a few of the best investment accounts for kids to help you get started:

  • Custodial IRA

  • 529 College Saving Plan

  • Custodial Brokerage Account

  • Certificates Of Deposit

  • UTMA/UGMA Account

Custodial IRA

A custodial IRA is one way to help your kids start investing in their future retirement. The account operates as either a traditional or Roth IRA, though it must be opened and managed by a parent until the child reaches age 18. At that point, the account can be fully transferred to the child. A custodial IRA can give kids a head start on their future retirement income and provide them with the opportunity to learn more about stocks, bonds, and securities.

The decision between a traditional or Roth IRA will be up to the parent to decide, so it’s always a good idea to review the differences. A traditional IRA is typically used by adults to reduce their current taxable income; while a Roth IRA allows users to enjoy tax-free withdrawals once they reach retirement age. For the most part, parents opt for a Roth IRA when opening up a custodial account, though the decision is entirely up to you.

529 College Saving Plan

A 529 College Saving Plan is an account that allows parents to contribute to a child’s future college fund, with certain tax advantages at play. This account type first started in 1996 and has grown in popularity as families attempt to cover rising educational costs. The money can be withdrawn at any time and can even be applied to K-12 education if necessary. The contribution limits are set at $75.000 for single parents, and $150,000 for married couples.

There are two main types of 529 college saving plans: savings and prepaid. A savings plan is typically offered through your state of residence and allows you to contribute to an account on behalf of your child for their future tuition. A prepaid plan involves purchasing tuition credits at their current prices, to be applied at a later date. Prepaid plans are offered by states or specific institutions.

Custodial Brokerage Account

Brokerage accounts are another great opportunity to start investing with your kids. These accounts can be opened up by parents and transferred to a child once they reach age 18 or 21, depending on the state. Brokerage accounts allow investors to choose from stocks, bonds, securities, and index funds. The main benefit is not only can they pay out dividends, but there are less restrictions for withdrawals when compared to an IRA.

The most important thing to consider before investing in a brokerage account on behalf of your kids is which institution to work with. Research account minimums, transfer fees, and what (if any) educational tools are available directly for kids. Here are a few common options to kick off your search:

  • Fidelity: Fidelity offers a diverse range of potential investments including stocks, bonds, CDs, and mutual funds. There are no account fees or minimum requirements to invest, and withdrawals can be made at any time as long as they are for the benefit of the minor.

  • E-Trade: This is a great platform for parents looking for an account without contribution limits or withdrawal constraints. E-Trade also offers several educational tools for account holders and various investment options.

  • Acorns: Acorns is popular among investors of all ages because of its easy-to-navigate platform. Parents can use the website or app to manage their children’s accounts, and there are numerous investment types to choose from. Note that there are some account fees depending on where you invest.

Certificates Of Deposit

Certificates of Deposit (CD) allow you to create consistent growth for your child’s financial future over time. CDs are most commonly used with an investment strategy called laddering. This involves purchasing multiple CDs with different maturation dates and interest rates and then reinvesting the earnings into more CDs. Over time, this will create stable growth of your child’s investment. This is an excellent option for parents looking for a low-risk way to introduce young children to investing.

UTMA/UGMA Account

There are two other investment types that can be great opportunities when investing for your child: Uniform Transfers to Minors Act (UTMA) or a Uniform Gift to Minors Act (UGMA). These accounts operate similarly to a custodial IRA, except children can access the funds for college (instead of waiting until retirement age). The annual contribution limits for a UTMA or UGMA account are $15,000 for single parents or $30,000 for married couples. The funds can be withdrawn for a number of costs associated with education, such as application fees or student health insurance.

investments for kids

Investing For Kids: How To Teach The Basics

The best approach for teaching financial concepts to your children is to take it slow and build a strong foundation. Start with the basics, such as spending or saving and go from there. When they are ready you can begin explaining more complex topics, like stocks and investing. Read through these steps as you approach the investing basics with your kids:

  1. Show Them How To Save

  2. Teach Them Investing Basics

  3. Talk About Stocks & Bonds

  4. Open An Account

  5. Let Them Start Investing

  6. Keep Their Attention

1. Show Them How To Save

Saving is a concept you can introduce to children from a young age, even before specifically applying it to money. For example, think about any rewards systems you have in place for your child. You can demonstrate what it means to save up their points, tokens, toys, etc., by setting achievable goals. Budgets are another concept you can introduce fairly early on as they begin to grasp what saving means. As your children get older, you can show them how to save their allowance or paychecks from a part-time job to purchase items they want. This can be done through a joint checking account or financial planning app.

2. Teach Them Investing Basics

As your children learn more about money and spending, try approaching the investing basics. A few introductory concepts include risk vs. reward and what it means to earn or lose money. Each of these ideas can be approached one by one and built upon as your children gain a stronger understanding of what they mean. Try relating these topics to things your children are interested in, such as sports, toys, or even movies. The key is to break down concepts in a way that engages them over time.

3. Talk About Stocks & Bonds

When they are ready, introduce your children to different types of investments, including stocks, bonds, or real estate. Broadly share how each of these investments works and, again, apply it to something they are interested in. For example, a great way to begin explaining stock investing for kids is to talk about a company they are familiar with, such as Netflix or even Legos. Explain how stocks make up ownership shares in the company and how they can be bought and sold by investors.

Don’t be afraid to brush up on your own financial knowledge before you begin talking to your children. Understanding how investments work is one thing, but knowing the best way to explain it to your kids is a completely different ballgame. Check out educational resources online and think through the best methods for teaching your children before you approach the conversation.

4. Open An Account

Research the options listed above to identify which investment type is best for your family’s financial goals. The above account types offer several tax advantages and investment strategies to benefit from. Deciding on the right one will come down to which platform you are most comfortable with, where you want the money to be invested, and how much you can contribute. Note that parents can opt for more than one investment account if they are able to.

5. Let Them Start Investing

After you decide which type of investment account is best for your child, invite them to learn more about it as well. If you have extra funds available, you can even let them choose which type of investments to make. One way to do this is by allowing them to decide how to invest a portion of their savings, such as $100 from their allowance or birthday gifts. They will be able to watch their account change over time and gain a better understanding of how that investment type works.

There are also options for parents who do not have the funds for any investments. Many platforms offer model portfolios or mock investments that allow users to choose investment options and watch them change over time. Check out Yahoo Finance or MarketWatch for these tools, and play around with the website before getting your kids set up. Even if you do not have the money to invest right now, you can still teach valuable financial concepts to your children.

6. Keep Their Attention

One of the most important steps to remember when teaching children of any age how to invest is to keep their attention. Finances can become “boring” over time, and the last thing you want to do is make them hate learning about it. Try to build on their financial knowledge step by step, and use summers or time off school to your advantage. You can incorporate financial concepts as soon as you think they are ready and take it as slowly as you need to.

Summary

Learning about financial concepts from a young age can help set your kids up for financial success later in life. Unfortunately, money management, tax planning, and other financial topics are simply not taught in schools. This leaves the responsibility up to parents. However, by learning about investing for kids and bringing these concepts up with your own children, you are taking an excellent step towards helping them achieve financial success.

What is your number one tip for teaching investing to kids? Share in the comments below.


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