Investing for kidsInvesting for kids

Investing for Kids: Setting Kids Up for a Bright Future

Updated:
September 23, 2022
Family Finance

Investing for the kids in your life can set them up for a bright financial future.

As opposed to just saving money, investing has the potential to make a much bigger profit.

There are a few ways to invest for kids, but they all have one thing in common – the goal of kickstarting a young one’s future goals.

Participating in the stock market from a young age prepares kids for financial independence as adults. They also get to enjoy the benefits of compounded interest.

Kids can learn about money, investing, compound interest, stocks, building wealth, and more.

How to Invest for Kids

Starting to invest for your kids can be broken down to a few easy steps.

Participating in the stock market from a young age prepares kids for financial independence as adults.

Get started in finding the right accounts for your kid’s investments and teach your kids about investing along the way.

1) Start Early

You can start investing for kids as soon as they are born. The earlier you start, the better, but remember that it’s never too late.

The best time to start is yesterday, but the next best time is today.

Kids have years and decades to let money compound over time.

You don’t need a lot of money to start investing. Many brokerages offer low or no fee trading and fractional share trading offers flexibility in choosing how to invest especially when you start with a smaller amount.

When investing for kids, time is on your side. Kids have years and decades to let money compound over time.

Finding money sources to fund your kid’s investments is easy.

Financial gifts for kids area great way to kickstart your kid’s investments. Reallocating childcare expenses into investments are another way to start investing without hurting your monthly budget. 

2) Choose the Right Account Type

investing accounts for kids

Do you want help pay for your baby’s college? To save for your kid’s first home down payment?

How about setting your kid up for retirement?

We all have different financial goals for our kids and there are different types of investment accounts for kids.

The different account types have different rules and tax benefits. Choosing the right account can help reach you and your kid reach those goals.

3) Choose a Brokerage

Once you decide on the account type, you need to choose the right brokerage for you.

A brokerage offers different account types and a platform that lets you buy and sell securities.

Make sure the broker offers the account type you want and need to hit your goals.

When choosing a brokerage, look at account fees, investment minimums, and trade commissions.

Make sure the investment options available at the brokerage match your investment strategy and knowledge. Check to see if they offer fractional share trading, index funds, and managed portfolios.

Read reviews and look at what existing customers say about the brokerage’s customer service.

As parents, if you’re looking for your kids to learn along the way, look for educational material and tools that can help involve your kid in the investing process.

4) Set up an Account and Start Investing

The next step is to open an account and fund it. You can open an account with most brokerages online in a matter of minutes.

Fund the account with monetary gifts or your own contributions.

If the account has a managed portfolio (like most 529 plans and some UTMA accounts offer), you’re all set.Your money will be invested based on your chosen strategy or portfolio mix.

If not, don’t forget to use the money inside the account to purchase actual securities!

Pick from index funds, ETFs (exchange traded fund), stocks and bonds. Just make sure you actually use the money in the account and don’t make the mistake of just leaving it there.

5) Engage The Kids

Involving kids in the investment process can introduce them to finance principles from a young age.

Picking kid stocks like Disney, Hasbro or McDonald’s will help kids relate to investing more.

When kids are old enough to understand what companies are and to recognize some kid friendly companies, they can start helping choose investments for their futures.

Picking kid stocks like Disney, Hasbro or McDonald’s will help kids relate to investing more. Kids will understand what it means to own a piece of a company they know and love.

Engaging your kids in conversations about investing can build up their financial literacy and prepare them financial independence in their adult lives.

6) Invest Often, Compound Interest

Habits are a powerful thing. Now that you have an account set up and chose a few investments, turn investing in your kids into a habit.

Figure out how much you can contribute to the account each month and set up an auto deposit.

Let family and friends know how they can invest in your little one’s financial future with monetary gifts.

Get financial gifts for birthdays, holidays and graduations.

Figure out how much you can contribute to the account each month and set up an auto deposit.

Invest the money in the accounts and watch as the account balance multiplies over the years.

Types of Investment Accounts for Kids

There are multiple types of investment account options for kids.

Some accounts let you invest for kids’ futures and some accounts are made for kids to invest in themselves.

Each account has different rules and tax benefits that help you reach various goals.

Investment account for kids: 529 plan

1. 529 Plan

529 plans are tax advantaged investment accounts for college and other education costs.

If you think your kid will go to college or a trade school and want to start saving for that goal, a 529 could be the account for you.

A 529 plan allows you to invest for K-12 tuition (tuition from kindergarten to the 12th grade), college and trade school in a tax-free way, similar to how retirement investment accounts work.

Specifically, assets in the account grow tax free, and you won’t have to pay capital gains taxes on your investment’s earnings if you use the investments to pay for school expenses.

Some 529 plans offer age-based managed portfolios that don’t require active management, making it even easier to invest with them.

Investment account for kids: custodial IRA

2. Custodial Roth IRA

If your kid has qualified earned income, you can set up and invest in a Custodial Roth IRA.

A custodial account is an account that is legally owned by the minor and actively managed by the adult custodian until the child becomes of age.

Roth IRAs can be used to set your kid up for retirement in a tax efficient way, plus they can use the funds in the account for college tuition or a first home purchase.

Contributions to Custodial Roth IRAs are made with after-tax dollars. Since children typically have low income and low tax rates, Roth IRAs make the best vehicle to save for their retirement.

Investment account for kids: UTMA account

3. UTMA / UGMA Account

Sometimes known simply as a custodial brokerage account, UTMA accounts are brokerage accounts, taxable investment accounts that let you invest for your child’s future, no strings attached.

UTMA accounts are legally owned by the child and managed by you, the adult, until the child is of age.

The age of adulthood for the child is between 18 and 25, depending on the state where the account is set up.

UTMA accounts are flexible and have no limitations on how to use the funds. They can help with save for college, financial independence, or starting a business. It’s up to the kid to decide when becoming an adult.

However, these accounts don’t offer any tax benefits beyond being taxed at the child’s tax level.

Investment account for kids: investment apps for kids

4. Youth Investment Account

Kids on the older side can start learning by doing.

Youth investment accounts are investment accounts made for kids to invest themselves.

Investing apps for kids offer investing with training wheels on. Parent supervised investing is a great way to teach kids about investing.

New youth investment accounts offer tools for parents to teach their kids about money and investments. Parents approve trades, learn and explore new investments with their kids, and kids can choose to purchase fractional shares that fit their budget.

Stock Investing for Kids

Buying stocks for kids is a great way to set them up for success.

When you’re a kid it might be a little tricky to buy your own stocks, but it's still possible with the help of an adult.

How old do you have to be to invest?

When you turn 18, you can open your own investment account and start investing in stocks, bonds, ETFs, and other investment vehicles.

Until then, kids can’t actively invest on their own.

In order to invest, kids need a custodial brokerage account (also known as a UTMA Account).

Instead, they can start investing with the help of their parents or another adult.

In order to invest, kids need a custodial brokerage account (also known as a UTMA Account).

Through a custodial account, the child legally owns the investment, but the adult actively controls the account until the child is of age.

Parents can set up a UTMA account for their child. They can then involve their kids in choosing investments, but will have to take the actions themselves.

Newer investment apps for kids offer a way for the kid to initiate investments and provide safeguards for the parents to monitor and approve activities.

How old do you have to be to buy stocks?

You need to have a brokerage account in order to buy stocks and need to be at least 18 years old to open a brokerage account.

However, custodial brokerage accounts are accounts that can be owned by minors and are opened by an adult.

With a custodial brokerage account, kids can invest in stocks and other financial assets with the help of their adult custodian.

With a custodial brokerage account, kids can invest in stocks and other financial assets with the help of their adult custodian.

Parents can set up and manage investment accounts for their children at any age, as soon as the child is born.

Popular investment accounts that parents open for their kids include 529 plans, UTMA accounts, and Custodial Roth IRA.

How to buy stock for a child?

Buying stock for a child can be easy if you are the child’s parent but could be tricky otherwise.

As the parent, set up an investment account for your child. This could be a custodial brokerage account or a 529 account.

You can also buy stocks in a regular taxable brokerage account that you own, but then there’s nothing to say that it is your child’s stock officially.

Once you have the account setup, fund it. Then, with the funds in the account, choose a stock and buy it. Simple.

If you’re not the child’s parent, buying stock for the child as a gift is more complex. You’ll need the child’s sensitive personal information like social security number, date of birth, and address.

Instead, consider gifting money to the child and have the parents invest the money.

How to teach kids about investing?

Teaching kids about investing can prepare them for financial independence and a better financial future.

Building generational wealth is a multi-generational effort. You need to make sure your kids know how to manage money well.

Teach your kids personal finance and investing from a young age.

teach kids about investing

When they are old enough to understand, usually ages 8-10, start telling them what investing means.

Take them through an example that they will understand. Start with stocks for kids, like Hasbro, Disney or McDonald’s.

Let them choose a stock to purchase, and then track the progress over a time.

When they grow older and become young teens, give them more control. Set up an investment account for them that lets them pick their own investments.

Let them choose a stock to purchase, and then track the progress over a time.

Finally, teach them about index funds, ETFs, and other diverse ways to build up their investing knowledge.

Learning about investing is an ongoing journey. Start early and teach them a little more every day.

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