I am a parent of one small child with another on the way and I have been investing for my first kid since he arrived home from the hospital two days after his delivery.

I don’t know how many hours I spent researching, reading articles, and watching videos about the best investments for kids and which child investment plans are best suited for their future. There are so many options out there that it can be overwhelming!

Nowadays, you can find an investment website or investing app for just about anything including investing for your kids.

The problem with this is that not all sites are created equally – some may be better than others when it comes to providing accurate information on the subject matter.

That’s why I created this article on the best investments for kids and the child investment plans to consider for your own children.

It aims to provide parents and grandparents like you with the latest options available. You can drill into which investments work best for your child’s needs based on their unique situation.

Let’s get started!

How to Invest for Your Kids and Teach Them 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.

Teaching kids about money and letting them start investing as a minor should go a long way toward assuaging this concern.

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.

Best Investments for Kids

Child Investment Account Options: Taxable

1. Custodial Accounts


The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA), also known as 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 what they choose with the funds.

This means they can use the money for anything they want.

However, parents, grandparents and other loved ones can still make sizable contributions to these custodial accounts by giving up to $15,000 per year per individual ($30,000 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% vs. a maximum 5.6% of savings for the parents.

In the table below, you can see some of the best custodial accounts to consider for opening a taxable account. M1 Finance also allows you to open a custodial IRA, an account discussed later in the article.

App Rating (out of 5)FeesBest ForPromotions
Acorns Earlyacorns logo4.8$1/month - $5/monthAutomated investing in the background into diversified investments; Round Ups$10 sign up bonus when making first deposit at account opening
Greenlight + Investgreenlight logo4.7$7.98/monthTeaching investing fundamentals with guidance from parents; allows individual and index fund investingFirst month free
EarlyBirdearlybird logo4.0$1/mo if over $200 invested; $2/gift paid by gifterSimple gifting and investing in a UGMA account for reasonable fees$10 for opening an account
Stash4.7$1/month - $9/monthEveryday people looking to start managing their finances$5 stock bonus for making a deposit of $5 or more
M1 Finance4.3$0 trading or automated investing; $125/year on M1 Plus subscription for custodial accountFee-free active trading and automated investing, Custodial IRAs$30 sign up bonus with $1,000 deposit
UNest4.5$3/month - $6/monthAge-based investments in custodial investment accountMatching bonus with $25 initial deposit ($25 bonus)

Child Investment Account Options: Tax-Advantaged

2. 529 Plans: Save for College and Qualified Education Expenses Tax Free


529 plan

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’s 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.

The contributions grow tax-free from federal income tax like a Roth account if the funds go toward qualified educational expenses. Most states also allow tax-free withdrawals as well.

You can contribute up to the annual federal gift tax exclusion amount each year, which is $15,000 per person per individual ($30,000 for married couples who file jointly) in 2021.

Like with custodial accounts above, this “annual exclusion” represents the maximum amount you can transfer as a gift to each person without incurring a gift tax.

If you can, you might consider “superfunding” your child’s 529 plan by contributing five years of gifts all at once per child per person. This provides an ample amount of money upfront without incurring the gift tax.

Understandably, not every parent can swing such a contribution, especially for multiple kids ($150,000 per child if both parents contribute) to cover the entire cost of college.

But, if it’s possible, this let’s the money compound over multiple years from when your kids are young kids.

You might consider asking your parents to help their grandchildren. This surely represents one of the best investments for grandchildren.

Be aware, though, using this option carries complicated rules, so consider getting the help of a tax professional to navigate these contributions successfully.

Also, 529 plans recently got the greenlight to improve how you can use the funds held within the account appropriately (i.e., without incurring the 10% withdrawal penalty).

The SECURE Act is a set of laws intended to improve retirement planning and savings plans. Rules from this new law allow up to $10,000 a year in 529 saving plans to be put toward paying down student loan debt or expenses related to registered apprenticeship programs.

529 Plans come in two types:

College Savings Plans


College Savings Plans work similar to traditional 401(k)s and IRAs. Contributions you make get invested into mutual funds or other investment vehicles like age-based investments called target date funds.

These differ slightly from the goals of age-based funds you see in retirement plans though. 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 get administered at the state-level, whereas retirement plans do not.

One option to consider for opening a 529 College Savings Plan is through the company Backer. The company provides top-tier 529 Savings Plans which can collect gifts from family and friends through social savings.

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!).

 

Prepaid Tuition Plans


While they are not available in every state, there is a way for parents of college-bound children to save money on their tuition. 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 back the participating institutions. If your child ends up attending a school out of state or at a private institution, you can transfer the value or apply for a refund.

3. Traditional and Roth IRAs


An Individual Retirement Account, or IRA, is a tax-advantaged savings account where you keep investments such as stocks, ETFs, bonds and other asset types. These accounts typically start with young adults because they require the account owner to have earned income.

However, in order to teach your child about responsible money management and tax-efficient investing, it can be beneficial for them to open a custodial IRA once they start earning a regular paycheck.

Then, you can help your children to choose the best investments that grow with tax advantages from their start as young children and onward into adulthood.

If you’d like to contribute from your IRA toward their education expenses, you can. While you don’t need to begin taking required minimum distributions (RMDs) until reaching age 72, you can begin as early as when you reach age 59½.

In fact, you can also start earlier if necessary. You can withdraw money from your traditional or Roth IRA before age 59½ without paying a 10% additional tax if the funds go toward paying for qualified higher education expenses for yourself, your spouse, your children or grandchildren in the year you make the withdrawal.

It is possible to avoid the 10% penalty for withdrawing your IRA funds before age 59½, and even though you will still need to pay income tax in most cases, having this cash on hand may come in handy.

Though, using these accounts to pay for your child or grandchild’s college education can come with its own set of drawbacks:

  1. You take money away from your retirement assets — taking already limited funds you can’t contribute again unless you still work — so make sure you are well-funded outside of the IRA.
  2. If you withdraw money from a retirement account to pay for qualified education expenses, this could compromise eligibility for need-based financial aid in the year following withdrawal.

If you want to avoid dipping into your retirement savings, you may be able to set up a Roth IRA in your child’s name. Though, this comes with a catch.

Namely, your child (and not you) must have earned income from a job during the contribution year.

Parents who have the means can contribute up to the maximum annual contribution as long as they earn enough money. The IRS does not care where the 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 let your kid keep the money and you contribute to their Roth IRA instead.

That way, your child can do something else with their earnings and you can still set aside an equivalent amount of money in their retirement account.

Though, remember, children need to 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 taking on the management and control of an account’s assets until the termination age as determined by state law. At this point, the assets and the account turn over to their possession.

Work with them while they’re young and looking to engage in teenage investing opportunities. This can provide valuable information and guidance as a way for teaching kids about money management.

You can use this to help them begin financial planning for the long-term.

Here’s how to do it: If your child is a minor (under 18 or 21 years old, depending on your state of residence), you will find many of the best stock investing apps for beginners will let you set up a custodial IRA.

One such app, M1 Finance, allows you to open a custodial IRA through enrolling in their M1 Plus subscription. For the first year, 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 and the app will even make a $30 deposit to go toward jumpstarting the balance once you fund at least $1,000.

These can act as free stocks to get the ball rolling even more on your children’s investment portfolios.

4. Coverdell Education Savings Account


A Coverdell Education Savings Account can be a useful way to save for education costs.

Much like 529 plans above, Coverdell ESAs are one of 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 grade schooling in addition to college costs.

Also like the rules overseeing 529 Plans, if you use funds from an ESA plan 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.

Investments for Kids

1. Stocks


Stocks represent one of the best investments for kids because they have a long-term orientation and will provide years of fruitful returns for your kids.

All of the child investment plans covered above allow you to hold stocks in some form or fashion through individual stocks, exchange-traded funds or mutual funds.

Custodial accounts, whether as a taxable account or a custodial IRA, allow you to hold numerous different assets within them in your child’s name. One common purpose for opening a custodial account is to invest in stocks for your kids.

If this is your goal, you can open a custodial brokerage account to begin investing on behalf of the child.

Investing in your children’s future is a rewarding and beneficial endeavor. You can use stocks to teach lessons to your children about the value of thrift, the importance of investing and general money management skills.

Getting them connected to investing may require tapping into other areas of their life to begin building an interest over time.

To get a child interested in the stock market, consider creating an individual portfolio of stocks for kids they’ll likely recognize from their daily lives.

Companies could include Apple, Google, Disney and many more. Children’s investment accounts will grow steadily over time if you invest in a portfolio of well-performing stocks.

As a minor tax benefit, these custodial accounts carry some tax breaks related to investment income, though you must still pay taxes above certain levels due to the Kiddie Tax.

This tax requires parents to pay the marginal income tax rate on all unearned income realized in the account. This rule applies to all unearned income for kids under 19 or full-time students under 23.

This doesn’t make the child pay higher taxes than their current wages. The IRS allows the first $1,100 of unearned income to be tax-free, the second $1,100 to be taxed at the child’s rate and then any balance above that at the parents’ rate.

This means that if you invest $1,000 each year for your child in a custodial account and they earn under $1,100 in dividends, they come tax free. However, if it’s $1,600, there will be taxes due on $500 of that amount.

If the account has $2,300 in dividends, $1,100 will be untaxed, $1,100 will be at the child’s tax rate and $100 at the parents’ rate.

If your child later sells any stocks held in their account, they will be subject to capital gains tax. Though, if held for longer than a year, they may qualify for slight tax breaks by having the gains fall subject to long-term capital gains tax and not short-term capital gains tax.

Long-term capital gains tax rates tend to have more favorable levels while the short-term capital gains tax rates incur the same rates as you pay on ordinary income.

2. Exchange-Traded Funds (ETFs)


ETFs have become increasingly popular over the past two decades. These investment vehicles replicate similar types of performance as mutual funds by holding an underlying, diversified portfolio of stocks, bonds, or other investments.

Where they largely differ, however, is by trading openly on the stock market exchanges.

Because of this feature, they often have better liquidity than mutual funds because they trade throughout the day.

ETFs can represent both passive and active investment options. Passive ETFs are index funds that track a broader market and may also be specific to a sector or group of related assets.

Investing in index funds provides instant diversification in one investment with low expenses. You do not need to engage in stock picking or participate in risky behavior like investing for quick profits.

Management expenses are negligible for passive ETFs because they invest in publicly traded stocks or funds which attempt to replicate the performance of a section of the market.

They don’t actively select stocks nor employ a research team to conduct top stock research services in the hopes of outperforming the benchmark.

Plus, trading commissions only come into play if you don’t invest through a free stock trading app.

Active ETFs can charge much higher management fees because they actively trade in and out of securities to achieve some stated investment objective.

ETFs can pay dividends, an excellent passive income idea to consider for building an income portfolio. They can also act as high-return investments over time.

3. Mutual Funds


Investing can be a daunting task for any investor, but many believe that young investors benefit from setting up mutual fund accounts at an early age.

These investment vehicles act like ETFs by purchasing a bundle of securities attempting to fulfill some stated investment aim.

Mutual funds build portfolios of underlying investments through pooling your money with that of other investors. This creates a larger collection of stocks, bonds and other investments, called a portfolio.

When a mutual fund’s securities’ values change, the net asset value (NAV) is adjusted accordingly by calculating how much more—or less—the fund would have to sell its investments for in order to fulfill shareholder redemptions.

This price changes based on the value of the securities in your portfolio at the end of each market trading day.

Owning a mutual fund in and of itself does not grant the investor ownership to the underlying securities. They only own the mutual fund shares themselves.

Mutual funds come in two types: passively managed and actively managed mutual funds.

Active mutual fund managers buy and sell investments based on their stock research and the investment strategy of the fund. The goal of portfolio management is typically to outperform a comparable benchmark—a commonly used but risky approach.

Passively managed mutual funds simply attempt to recreate the performance of a benchmark index like the S&P 500, Dow Jones or Barclays Corporate Bond Index.

You can invest in mutual funds through IRAs, 529 Plans and ESAs for your children and allow them to reap the long-term rewards of compounding returns in a diversified investment.

4. Savings Account


Starting to save can seem daunting, but parents can address that head on by making it an easy task for kids through repetition and understanding.

If you’ve already conquered the ability to save, be that parent who helps your kids learn about the importance of opening a savings account early and developing good money habits as early as possible.

If you want to help your children build a savings account balance or even help them open an account through a banking app for minors to handle money from their allowance or a part-time job, you’ve got options to make building savings a habit.

Doing so will provide them with an opportunity to earn some interest on their savings account, while also learning how to bank. Many even come with debit cards for kids and teens that allow parents to monitor spending and set guardrails for how they spend.

When choosing a youth savings account, you’ll want to pay attention to the following items:

  • interest rate
  • any fees or minimum balance requirements
  • how the grandchild can access the funds
  • how the account can grow with them as they mature.

Where to Open Investment and Bank Accounts for Grandchildren


Now that you know more about the types of child investment plans and accounts available for you to open on behalf of your children, you might want to consider which investment options to pick.

Thankfully, there are many all-in-one money apps for kids, allowing your kids to start saving, learn about spending and also how to invest money for the first time.

M1 Finance ($30 bonus) – Best for Custodial IRAs


m1 finance

  • Available: Sign up here
  • Price: Free trades, $125 subscription to M1 Plus required for custodial account

M1 Finance is an all-in-one personal finance solution that allows new investors to set up an account in seconds.

If you want to use this as a kids investing app, you’ll need to apply for an M1 Plus subscription. The company has a limited time offer of the first year for free ($125 value).

The service offers investors the ability to create Portfolio Pies, or a diversified portfolio that rebalances to help you achieve your money goals.

M1 Finance is a service designed for self-directed investors by offering flexible, customizable and automated financial solutions. The platform manages your money intelligently based on how you want.

Consider signing up for an M1 Finance custodial account or custodial IRA today.

 

Greenlight App


greenlight sign up

  • Available: Sign up here
  • Price: Free 1-month trial, $7.98/mo after for Greenlight + Invest

Greenlight + Invest is an investment account for kids that comes paired with a debit card.

It’s easy to use and can double as a savings account and banking apps for teens. The app will teach the basics of investing, how to invest in stocks and ETFs, etc.

It works best if parents and/or grandparents are involved in the process because it requires linked accounts from the custodians’ banks or brokerages.

The all-in-one plan teaches them important financial skills like money management and investing fundamentals — with real money, real stocks and real-life lessons.

You can use the investing feature to:

  • Buy fractional shares of companies your kids admire (kid-friendly stocks)
  • Start investing with as little as $1 in your account (with fractional shares)
  • No trading commissions beyond the monthly subscription fee
  • Parents approve every trade directly in the app on individual stocks and ETFs with a market capitalization of $1 billion+

Consider opening a Greenlight Card + Invest account to start investing in a custodial brokerage account for your kids today. The first month is free to trial the product and see if it meets your needs for giving one of the best investments for kids.

 

Acorns Early ($10 Bonus)


acorns

  • Available: Sign up here
  • Price: Acorns Lite: $1/mo, Acorns Personal: $3/mo, Acorns Family: $5/mo

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.

 

Other Assets to Give Your Kids

1. Savings Bonds


When my parents invested for me in the 1990s, they did so by purchasing savings bonds in my name. My parents used these to set aside money for me to pay for the costs of college.

Thankfully, once I reached college, I didn’t need the money they had saved for me through savings bonds. I had worked hard enough to earn scholarships and the necessary financial assistance to pay for private college without need for this savings.

I was fortunate enough to not need the college savings my parents had amassed for me. Instead, I cashed out these bonds and began investing in the stock market as a teenager. I invested well enough to use the proceeds to buy my first condo out of graduate school.

But for parents or grandparents who want to save money for their family with these zero risk financial products, you can still do so directly through TreasuryDirect.gov.

You can still cash your unused savings bonds at a financial institution, but you will no longer receive physical certificates.

A savings bond is a great investment because it grows without paying any taxes, but you must pay federal taxes on the bond when redeemed.

The rates on these bonds have fallen dramatically in the last decade, but if you can manage to hold onto them for at least 20 years, the Treasury guarantees doubling your original investment as a minimum.

Consider investing in savings bonds if you plan to start at least 20 years in advance and want a riskless investment. Otherwise, from the investment options covered above, you have more upside potential for providing investments for your kids.

2. Cash


The annual exclusion refers to $15,000 in gifts you can give to as many people as you want annually.

Married couples can combine their annual exclusions to give up to $30,000 ($15,000 x 2) to as many individuals as they like per year–tax-free.

As a parent, you can provide a financial gift for a child up to the annual exclusion each year without paying taxes. These gifts can help to pay for college, a car, wedding or even a home down payment.

If you gift in excess of the annual exclusion, the value of them counts against the lifetime exemption from estate taxes, which comes to $11.7 million per individual and $23.4 million per couple in 2021.

How to Gift Stock


You can either donate shares without first selling them, or gift the shares straight to your kids. If you want to invest for your children, there are lots of different options.

Now that you’ve reviewed some of the best money apps for teens and kids above, you may want to supercharge their investment account balance by gifting stock.

Transferring stocks from your account to theirs requires additional steps and considerations that may not be obvious beforehand and require additional steps than simply depositing cash.

  • Capital Gains Taxes

You are on the hook for capital gains taxes when you sell your stocks and make a profit. If you transfer appreciating assets like stock at a gain, neither party will pay any capital gain at the time of transfer. Your basis and holding period transfer with the stock position.

This can be a way to show your kids how to increase net worth.

  • Gift Tax Rules

Next, as we’ve covered a few times above, you should also understand gift tax rules. For most individuals, this won’t pose a problem so long as the annual amount of gifted stock falls below $15,000 per person (or $30,000 per married couple filing jointly).

  • Financial Control

Finally, you’ll also want to consider how to maintain control over these positions. Giving stocks as gifts means that you surrender control of the stocks to those who receive them.

One way to invest for your children or grandchildren is through establishing a trust. Limitations can be put on the funds given in this type of investment.

Consider this resource for learning more on how to gift stock.

Investing for a Child: Saving for Their Future


To ensure that they will be more successful than their parents, parents and grandparents need to invest in the future success of their children.

Properly investing is a way for parents to demonstrate that they are committed to seeing the next generation succeed rather than struggle even if this means changing some things about their lives.

By providing financial support to your children, you can empower them with the resources they need to live a better life.

A long-term goal for many parents and grandparents is that one day kids will be able to sustain themselves without any outside help. Investing in a child’s future shows you are committed to this goal.

About the Site Author and Blog

In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time.  My job routinely required extended work hours, complex assignments, and tight deadlines.  Seeking to maintain my momentum, I wanted to chase something ambitious.

I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity.  I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.

Disclaimer

I have not been compensated by any of the companies listed in this post at the time of this writing.  Any recommendations made by me are my own.  Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.

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