I am a parent of two small children, and I have been investing for both of them ever since each arrived home from the hospital.
I don’t know how many hours I spent researching, reading articles, and watching videos trying to figure out the best investments for kids and which child investment plans are best suited for their future. But I do know that were so many options, I felt overwhelmed pretty quickly!
Nowadays, you can find an investment website or investing app for just about anything, including education on investing for your kids. The problem? Not all sites are created equally. Many of these sites only provided somewhat accurate information about financial subjects. That means many parents were getting incomplete answers to vital questions about building their kids’ financial future.
That’s why I’m writing this article about the best investment accounts for kids—and in fact, that’s why I’ve created this entire website!
As for this article? My hope is to provide parents and grandparents like you with the best and latest options available. That way, you can drill into which investments work best for your child’s needs based on their unique situation.
Let’s get started!
Best Investment Accounts for Kids—Top Picks
Open a Fidelity® Youth Account for your teen, and Fidelity will drop $50 into their account. Get $100 for yourself when you open a new Fidelity account and fund with $50¹.
$5/mo for Acorns Family
How to Invest for Your Kids
Investing for kids isn’t hard—if you know where to start. And the best place to start is with two of the basics:
- The best investments for kids. (Click the link to learn more about that.)
- The best investment accounts for kids, which we’re going to dive into here.
When it comes to investment accounts, don’t think about it in terms of what’s best period. Just think about it in terms of what’s best for you and your financial situation. Maybe you care about parental controls. Maybe you care about certain tax advantages. Maybe all you care about is making sure the account can hold cheap index funds.
So just remember: Keep your own preferences and needs in mind as we explore five of the best accounts for children.
Child Investment Account Options: Taxable
First, we’ll delve into the type of investing accounts that have no special tax advantages.
1. Joint Brokerage Accounts
The standard type of brokerage account is an individual brokerage, in which one person is listed as the account owner.
A jointly owned brokerage account, however, allows two or more people to sit on the account’s title and act as owners of all assets within the account.
These accounts most commonly exist between spouses. However, they can also be opened between two or more individuals who share financial goals (say, unmarried partners or business partners), or more to the point of investing for kids, multiple family members (say, a parent and child).
There are three types of joint brokerage accounts:
- Joint Tenants With Rights of Survivorship: All owners of a joint brokerage account share equal ownership of assets held in the account; if one owner dies, the survivor(s) receive the decedent’s share of the account.
- Tenants in Common: Similar to Joint Tenants, assets are shared equally but do not pass to the other owners should one owner pass away. Assets pass to their estate.
- Community Property: Only available in a limited number of states, this allows for spouses to share assets equally between one another. If a spouse dies, the assets go to their estate.
There is no “right” type of joint brokerage account—it ultimately comes down to your own personal preferences and financial situation.
When a parent and child have a jointly owned brokerage account, they can share in the decision-making of what to buy and sell. Many investing apps for kids allow you to open a brokerage account with joint ownership.
Fidelity® Youth Account ($50 bonus for teens, $100 bonus for parents)
- Available: Sign Up Here
- Price: No account fees, no account minimum, no trading commissions
- Promotion: Teens get $50 on Fidelity® when they open an account; parents get $100 when they fund a new account
Is your teen interested in jumpstarting their financial future? Do you want them to build smart money habits along the way?
Of course you do! Learning early about saving, spending and investing can pay off big when you start on the right foot. And one tool that can help your teen get that jump is the Fidelity® Youth Account—a brokerage account owned by teens 13 to 17 that’s designed to help them start their investing journey. They can use their own brokerage account to start their investing journey by trading most U.S. stocks, exchange-traded funds (ETFs), and Fidelity mutual funds in their accounts.
Your teen will also get a free debit card with no subscription fees, no account fees, no minimum balances, and no domestic ATM fees. And they can use this free debit card for teens4 to manage their cash and spend it whenever they need.
And as for building smart money habits? You and your teen can access Fidelity’s Dedicated Youth Learning Center, which is packed with materials developed specifically to help teens develop good financial habits.
Controls Parents Want and Need
A parent or guardian must have or open a brokerage account with Fidelity® to open a Fidelity® Youth Account. For new Fidelity® customers, opening an account is easy, and there are no minimums and no account fees.
Parents and guardians have plenty of tools they can use to monitor their teen’s activity: They have online account access, can follow monthly statements and trade confirmations, and can view debit card transactions made in the account.
To make it even easier, you can set up alerts to notify you of trades, transactions, and cash management activity, keeping you firmly in the loop on actions your teen takes across the Fidelity® Youth Account’s suite of products.
If your teen has an interest in learning about investing and taking their first steps toward building their financial journey, you should consider opening a Fidelity® Youth Account. The account comes custom-built for their needs, which will help them become financially independent and start investing for their future.
Read more in our Fidelity Youth Account review.
2. Custodial Accounts
Custodial accounts allow you to put investments in a special account for a minor child or grandchild. As the account’s custodian or trustee, you have control of it until your child reaches adulthood—typically 18 to 21 years old. Once your child reaches adulthood, they become the owner of their individual account and can do whatever they want with the funds.
There are two main types of custodial account: Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA). Let’s quickly look at the two main differences between UGMA and UTMA:
- A UGMA custodial account can be used to hold only strictly financial assets, including (but not limited to) stocks, bonds, mutual funds, exchange-traded funds (ETFs) and insurance products. UTMA accounts can hold those assets, but also any property—say, real estate or cars.
- The UGMA custodial account structure has been adopted in all 50 states. However, only 48 states have adopted the UTMA custodial account. (South Carolina and Vermont are the exceptions.)
Parents, grandparents and other loved ones can make sizable contributions to these custodial accounts by giving up to $16,000 per year per individual ($32,000 per married couple) without triggering the gift tax.
If you are concerned about the impact of your child’s assets on their eligibility for federal financial aid, then a custodial account might not be right. Students are expected to contribute a higher percentage of savings versus what their parents might be able to, usually 20% versus a maximum 5.6% of savings for the parents.
You might consider one of the leading custodial accounts through Acorns Early, offered by the Acorns app.
- Available: Sign up here
- Price: $5/month
Acorns offers a custodial brokerage account for parents and grandparents interested in opening an investment account for their family called Acorns Early.
Acorns Early offers investment portfolios of various risk levels for kids, so you can feel confident in the account you’re opening up for your little one. This app can be a great way to teach minors how to invest money.
The best part about Acorns is that it doesn’t require any minimum deposit to get started and allows you to contribute money on a regular basis.
One of the best ways to start saving for your grandchild is through a savings and investing account product like Acorns Early.
Read more in our Acorns review.
Related: Custodial Account Rules for Children
UGMA Accounts With EarlyBird
- Available: Sign up here
- Price: $1/mo. (first $200 managed free); $2 per gift (for the giver)
EarlyBird is a mobile app that allows parents and guardians to set up a Uniform Gifts to Minors Act (UGMA) account (more on those below) to gift money for investments to their children. This app provides a convenient and inexpensive way to gift money, with funds available to go toward any expenses that will benefit the child.
Givers can also personalize the moment by recording a video to go with the gift. And if you want to give but the recipient doesn’t have a custodial account through EarlyBird, you can text them a link from the app to the recipient’s phone number.
EarlyBird portfolios use diversified ETFs to achieve their gains. Custodial account holders can select from five different portfolios, ranging from conservative (100% bond ETFs) to aggressive (100% stock ETFs).
Child Investment Account Options: Tax-Advantaged
Next, let’s explore a few investing accounts that actually come with varying types of tax perks.
3. 529 Plans
A 529 plan is a special tax-advantaged investment plan that lets families save for the current and future costs of schooling for a beneficiary.
Traditionally, these plans could only cover college-centric qualified educational expenses, but tax reform from 2018 enlarged the scope to include eligible expenses from K-12 as well.
When thinking of one of the best ways to invest $1,000 for a child or more each year, consider a 529 savings plan. These can help your child financially while limiting your own tax liability when you liquidate the investments held in the account.
A child’s 529 plan offers high limits on the amount you and others can contribute to it. Contributions are made after-tax, meaning you can’t take a tax deduction for them. However, the contributions grow tax-free from federal income tax, just like a Roth IRA, if the funds go toward qualified educational expenses. Most states also allow tax-free withdrawals as well, also like a Roth IRA.
You can contribute up to the annual federal gift tax exemption amount each year, which is $16,000 per person per individual ($32,000 for married couples who file jointly) in 2022.
529 plans come in two types.
Type 1: College Savings Plans
College savings plans work similar to traditional 401(k)s and IRAs. Contributions you make get invested into investment vehicles such as mutual funds, which include age-based investments called target-date funds.
These differ slightly from the goals of age-based funds you see in retirement plans, however. Instead of gradually becoming more conservative as you near retirement, these transition to more stable underlying investments as your child nears college age.
These plans also are administered at the state-level, whereas retirement plans are not.
One option to consider for opening a 529 college savings plan is through Backer. The company provides top-tier 529 savings plans, which can collect gifts from family and friends through the social savings platform.
529s With Backer
- Available: Sign up here
- Price: $3/mo. (one child), $6/mo. (multiple children)
A great option to consider is Backer. Backer, a hassle-free 529 Savings Plan where your family and friends can play a role, has helped families save over $20 million toward college in just minutes.
You can use the 529 plan to put your child on track to afford college; all while remaining invested in an asset class that will grow over time.
You are able to invest using Backer’s portfolio of low-cost index funds including: large company stocks (S&P 500), small cap stocks (Russell 2000) international company shares (MSCI EAFE Index), U.S. government bonds (Barclays Aggregate Bond Index).
You can share an invite code for friends and family to make contributions to a 529 savings plan for birthdays, holidays, or other noteworthy events (like making honor roll).
Type 2: Prepaid Tuition Plans
There is a way for parents of college-bound children to save money on their tuition, though it’s not available in every state. By investing today’s tuition rates into a prepaid plan, kids can lock that price for the next 18 years and avoid paying increases over time.
Essentially, prepaid tuition plans are a presale on college tuition that can be an alternative method of building college savings.
The tuition program will cover college expenses for eligible recipients while they are in school and pay the participating institution(s). In the event your child goes to a non-participating college, you should still be able to use the value in the account, just not at the favorable tuition rate.
While 529 plans vary from state to state, you can typically open a 529 account through national brands such as Fidelity and Vanguard.
4. Traditional and Roth IRAs
An Individual Retirement Account, or IRA, is a tax-advantaged savings account where you keep investments such as stocks, bonds, ETFs, mutual funds, and other assets and vehicles.
There are two ways IRAs can be useful in saving for your child: Using your own IRA to contribute toward your child’s education, or opening an IRA for your child to save toward their retirement.
Contributing toward your child’s education
First, you need to know about the two primary types of IRAs:
- Traditional IRA: Traditional IRAs allow you to contribute pretax dollars toward your retirement savings equal to the lesser of your earned income or $6,000 per year (you can contribute an additional $1,000 per year if you’re 50 or older). You take a tax deduction at the time of contribution and pay taxes when you make withdrawals. If you withdraw before age 59½, you pay an additional 10% tax penalty.
- Roth IRA: Roth IRAs work in reverse, allowing you to contribute after-tax dollars toward your retirement. This enables your investments to grow tax-free over time. Contributions are never taxed again—not while they’re in your account, nor once you withdraw them, which you can do at any time. However, earnings are subject to taxes and penalties if you withdraw them before age 59½.
These accounts aren’t tied to an employer, and instead supplement your savings alongside a workplace retirement plan, such as a 401(k).
Opening an IRA for your child
If your child can begin saving for retirement as a teenager, those additional years of savings can result in significant returns through additional years of compounding.
Thus, parents might consider opening a custodial IRA—an IRA opened and held by an adult custodian for a minor, typically their child—to start investing money toward retirement.
But, which type of IRA makes the most sense? Well, let’s go back to their tax treatment:
Traditional IRAs allow you to claim a tax deduction now and pay taxes later—valuable if you have higher tax rates now than you anticipate paying in retirement. Conversely, Roth IRAs lock in your lower tax rates now and withdraw money in retirement when you might earn more money later.
Because teens are likely to earn lower incomes now, it generally makes the most sense to open a custodial Roth IRA to begin their retirement savings.
Note: If your teen has earned income—say, from a summer position or after-school job—you might be able to let them keep their earnings while you contribute to their Roth IRA on their behalf. Parents who have the means can contribute up to the maximum annual contribution as long as their teens earn enough money. The IRS does not care where the IRA funds come from, so long as it doesn’t exceed what your child earns in one year.
For example, if your child works as a waitstaff member and earns $2,500 for the summer, you can contribute $2,500 to their Roth IRA and allow them to keep their wages instead. That way, your child can enjoy their wages and still have something saved away in their retirement account.
Just remember: Children must have earned income for anyone to be able to contribute to their custodial IRA.
How to Open a Custodial IRA for Your Child
If you wish to open a custodial IRA for your child, the custodian of a child’s account (that’s you!) holds responsibility for managing the account’s assets until the termination age as determined by state law. At this point, the assets and the account turn over to your child.
Here’s how to do it: If your child is a minor (under 18 or 21 years old, depending on your state of residence), many of the best stock investing apps for beginners will let you set up a custodial IRA.
Custodial IRAs Through M1 Finance
One such app, M1 Finance, allows you to open a custodial IRA through enrolling in their M1 Plus subscription. For the first three months, the company offers this as a free service. Thereafter, it amounts to $125/year.
One way to invest for your child’s future is to automate investments by creating a child investment plan with this app. You can also use the app to diversify your portfolio with index funds and stocks.
Consider opening a custodial IRA through M1 Finance.
5. Coverdell Education Savings Account
A Coverdell education savings account (ESA) can be a useful way to save for qualified education expenses.
Much like 529 plans above, Coverdell ESAs are among the most common education savings investment options due to their favorable federal income tax treatment. These accounts also allow you to put money toward qualified education expenses of K-12 schooling in addition to college costs.
Also like 529 plans, if you use funds from an ESA on nonqualified expenses, you will incur a 10% penalty. Plus, you’ll also be on the hook for capital gains tax on any gains recognized in the account at the time of sale.
You cannot deduct Coverdell contributions, and you must make them before your children reach the age of 18 (or later if they qualify as a special needs beneficiary by the Internal Revenue Service).
You can set up more than one ESA for a single beneficiary, but with these accounts the same maximum contribution applies across all of them (rather than an individual $2,000 limit).
This means you can have multiple ESAs, but you can only contribute up to $2,000 per year in aggregate across them.
How to Teach Your Kids Self-Sufficiency
Investing for kids isn’t hard—if you know where to start. Parents often stress about providing for their children into adulthood and transitioning them to making their own money management decisions.
And you don’t need to come from money to build a solid financial future. If you’ve got spirit and persistence, there’s no need for you to come into the world with a silver spoon.
Not only should you focus on teaching your children financial literacy, you should show how navigating these decisions regularly will play critically important roles throughout their life.
For parents intent on putting their kids on the right financial path as early as possible, here’s a quick set of steps to get them started:
- Build an understanding of money, its worth and how to earn it.
- Begin investing in your children’s future and showing them how to participate.
- Grow your children’s earnings potential through teaching and practicing soft skills like teamwork, compassion, and collaboration while encouraging schoolwork and extracurriculars.
- Teach kids how to combine these skills to build a career and invest their earnings toward a secure financial future.
With these steps, let’s now take a look at some of the best investments for kids and the child investment plans to consider for getting your child started.
Questions & Answers
What Investment Accounts Can Hold Mutual Funds for Kids?
Mutual funds are one of two assets that can be held by all of the investment accounts listed above. (The other is cash.)
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