“What is the best way to invest $1,000 for a child?”
This is a difficult question for many people to answer. What’s best?
A savings account or college fund? The stock market or real estate?
The answer depends on the person, but there are some common sense guidelines that you should follow when considering investment options for your child.
In this blog post we will take a look at the best way to invest $1,000 for a child, considerations to make and examine several of the different investment opportunities available.
Why You Should Invest While Young
Investing isn’t just for adults. Many often say youth is wasted on the young. In the case of investing, this isn’t the case.
Compounding returns can differentiate a portfolio significantly in terms of performance. To illustrate, let’s consider two simple examples of the power of compounding.
→ Compounding Example 1:
Imagine a parent who invests $1 per day from birth until the child’s 18th birthday into a low-cost S&P 500 index fund that averages an annual return of 8.5%.
The child never invests another dollar in this account from then until retirement at 68.
The child would have received $6,574 in contributions before reaching 18.
After 68 years of compounding at that annual return, the child would become a millionaire on this account alone by having a total wealth of $1,068,540.
→ Compounding Example 2:
Now imagine another person who never saved a cent until their 18th birthday. From that day until retiring at 68, this person also invests $1 per day and receives the same 8.5% annual return.
This adult would have contributed $18,262 to the retirement account. In return, this retirement account balance would only amount to $293,072.
The second example didn’t do anything different beyond waiting longer to invest. This speaks to two things: first, the power of compounding. Second, the efficiency of tax-advantaged retirement accounts.
Investment Accounts for Kids
Kid investment accounts span across a few different areas and depend on your investment objective.
For example, if the goal is college savings or paying off student loans, 529 plans might work best.
If you are looking for a retirement account to fund your child’s future needs, then go with an IRA.
And if you want a way to teach kids about investing and have fun doing it at the same time, you might consider a UGMA/UTMA custodial account to do that.
1. 529 Plans
For those lucky enough not to have noticed, college now costs a small private fortune to attend. If the trend continues unabated, you can expect the cost for your child to attend college to become even more unaffordable by the time they’re ready to pack up and move into the dorm.
Fortunately, the tax law allows for you to save for college expenses in a tax-smart way with 529 plans.
These plans allow you to save after-tax money in suitable investments which you can sell to pay for qualified educational expenses. If used for this purpose, you won’t need to pay taxes on any realized gains from the account.
They are relatively easy to establish and offer some of the great returns on your investment when compared with other ways to invest $1,000 for a child.
For example, if you invest $1,000 per year for your child in a 529 plan and receive the same 8.5% annual return as above, you can expect to make $18,000 worth of contributions and have an ending balance of $46,866.
That’s a major step toward paying for college expenses, especially if your child can earn scholarships and consider attending an in-state school.
529 plans have evolved to include more than college expenses, however. After tax reform in 2018, the plans now can be used to:
- Pay for qualified expenses relating to K-12 public, private and religious schools.
- Pay for college and other post-secondary education expenses like for professional school or graduate school
Most withdrawals count as tax-free and:
- Single parents can contribute up to $75,000 per year
- Married couples can contribute up to $150,000 per year.
529 plans technically invest in plans organized at the state level, meaning each state has its own set of rules tied to 529 plans and the investment options available.
The best 529 plans allow funds contributed from an individual, couple, or family members (up to the annual gift exclusion).
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 towards 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 companies shares(MSCI EAFE Index), US government bonds(B Barclays Aggregate Bond Index).
In sum, 529 plans offer a narrow set of uses on qualified education expenses. They can provide a means to avoid having your children take on costly student loans and offer tax incentives to do so.
For financial needs outside of schooling, you might consider opening a UGMA/UTMA custodial account or custodial IRA.
2. Custodial Accounts (UTMA vs UGMA)
You can contribute money to the account and manage it with their ability to see how you handle the investments together. A single adult can contribute up to $15,000 per year to the custodial account while a couple can contribute up to $30,000 per year if they file taxes jointly.
Custodial accounts come in two flavors:
- UTMA (Uniform Transfer to Minors Act) – These accounts allow a custodian to invest in traditional assets like stocks, bonds, ETFs, mutual funds and related securities.
- UGMA (Uniform Gifts to Minors Act) – This type of custodial account can be used in a variety of ways, which include alternative investments. Along with their traditional uses like financial assets and investment vehicles, UGMA custodial accounts can also be used to store items such as property deeds, automobiles and valuable art collections.
A parent, guardian or other individual (the custodian) opens an account in the child’s name and contributes money irrevocably into the account. That means money placed into the account cannot be taken back. It remains the property of the minor.
The account then transfers ownership when the child reaches the age of majority in his or her state of residence.
Custodial accounts are often used as a means of investing money that you want to remain with your child until they come of age, or when they graduate from high school.
If you can only invest $1,000 at your child’s birth in a custodial account, you’ll have an ending account balance of $317,227 in retirement. That’s over 300x on your $1,000 contributed at birth under the same 8.5% average annual return scenario.
If you contribute $1,000 every year from your child’s birth until the turn 18 and let the money compound until turning 68, they’d have $3,236,705. That’s a fantastic return any kid would be grateful to receive.
3. Custodial IRAs
Retirement accounts might seem like an odd choice for a teenager to trade stocks because retirement is over 50 years away for them.
But recall the example from above and how the one child who only invested $1 a day from birth until turning 18 became a millionaire through compounding. Now, imagine investing more and then continuing to invest past becoming an adult.
The money in the account would swell over time, securing their retirement just from a few actions taken very early on in the child’s life.
But, children can’t open an investment account by themselves. They need to make use of a custodial account. You’ll serve as a custodian until your child turns 18. When they reach adulthood, the account ownership reverts to their hands.
Though, be warned, when you or others make contributions to a custodial account, these funds become irrevocable, meaning they legally belong to the minor investing in the account, both the contributions and gains.
Securing those gains from above from taxes means you’ll want to invest in a tax-advantaged account. That means they need to open an IRA.
In their case, that means needing earned income and also contributing their tax-advantaged retirement savings into a custodial IRA at that.
You can open a custodial IRA at M1 Finance and begin automating your contributions and investments for many years to come.
Custodial IRAs come in two flavors: Traditional vs. Roth.
Traditional vs. Roth
Every individual with earned income can contribute to an individual retirement account, or IRA. These accounts come in multiple flavors depending on your needs, but most commonly as standard Traditional and Roth IRA types.
These two accounts essentially mirror each other with how they handle taxes.
- Traditional IRAs allow you to deduct your contributions from your taxable income in the year of contribution. This defers taxes until you withdraw them in retirement.
For example, if you have a taxable income of $50,000 and contribute $1,000 to your traditional IRA, you’ll only have a taxable income of $49,000. This means you pay taxes at the 22% rate and you’ll pay $220 less in taxes that year, all else equal.
- Roth IRAs differ because they don’t offer any upfront deduction for contributions like a traditional IRA does. Instead, you contribute after-tax money into a Roth IRA and can withdraw it tax-free in retirement.
You would contribute to a Traditional IRA if you think your income tax rate will decline in retirement compared to now. Conversely, if you think you will have more income in retirement than you do now, you will want to contribute to a Roth IRA.
Kids who have earned income likely want to contribute to a Roth IRA because they only stand to earn more money after finishing school and working full-time.
Further, they probably don’t need to lower their taxable income to fall into a lower tax bracket now like they would with a Traditional IRA later.
Therefore, opening a custodial Roth IRA for a child who earns income makes the most sense. A custodial Roth IRA allows your child to make tax-free withdrawals on their account’s earnings when they retire.
One important rule to know about Roth IRAs, however, is that you may encounter a 10% penalty for making an early withdrawal.
Certain use cases allow you to withdraw contributions the account owner has made into the account like buying a first-home.
The trick will become convincing your child to leave the money in the account once they legally gain access upon turning 18. This way, they reap compounding returns while also avoiding a nasty penalty.
What is the Kiddie Tax Rule?
One area you’ll need to be aware of for custodial accounts is the kiddie tax rule. People took advantage of the loophole from gifting shares of stocks to their kids and the government caught notice.
The federal government passed the kiddie tax, preventing people from abusing this loophole.
This tax requires parents to pay the marginal income tax rate on all unearned income realized in the account. This rule applies to all investment 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 put $1,000 into an Acorns account each year for your teenager and they earn under $1,100 in dividends, it’s tax free. However, if it’s $1,700, there will be taxes due on $600 of that amount.
If the account has $2,500 in dividends, $1,100 will be untaxed, $1,100 will be at the child’s tax rate and $300 at the parents’ rate.
If your child takes this income out of the account, this could be a good way to teach teenage money management.
What is Micro-Investing?
A powerful tool to get your kid to start investing early is something called micro-investing.
Micro-investing is a method that allows you to invest small sums of money, which can be as little as $0.25 per day.
A micro-investing platform is a type of investing where the individual invests in stocks or other assets on an ongoing basis over time, with each investment being very small and thus low-risk because it will take years to grow in value.
Remember the example above about investing $1 per day every day? That small, steady progress reaps huge gains over long enough periods of time.
One app that made this possible is Acorns, one of the better custodial IRA choices on the market for this very reason. I highlight this app in the next section.
What are the Best Ways to Invest $1,000 for a Child?
One of the best ways to invest $1,000 for a child includes buying stocks through custodial accounts. The best ones include the following stock investing apps for beginners. Descriptions of each app follows the table below.
|App||Rating (out of 5)||Fees||Best For||Promotions|
|Acorns Early||4.8||$1/month - $5/month||Automated investing in the background into diversified investments||$10 sign up bonus when making first deposit at account opening|
|Greenlight||4.7||$4.99/month||Teaching investing fundamentals with guidance from parents||None|
|Stash||4.7||$1/month - $9/month||Everyday people looking to start managing their finances||$5 stock bonus for making a deposit of $5 or more|
|M1 Finance||4.3||$0 trading or automated investing; $125/year on M1 Plus subscription for custodial account||Fee-free active trading and automated investing||$30 sign up bonus with $1,000 deposit|
|UNest||4.5||$3/month - $6/month||Age-based investments in custodial investment account||Matching bonus with $25 initial deposit ($25 bonus)|
1. Acorns Early ($10 Bonus)
- Available: Sign up here
- Price: Acorns Lite: $1/mo, Acorns Personal: $3/mo, Acorns Family: $5/mo
Acorns offers a custodial account for parents interested in opening an investment account for their child called Acorns Early.
Acorns Early offers investment portfolios of various risk levels, 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 teenagers how to invest money.
The best part about Acorn 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 for parents to invest $1,000 for their child’s future is in a custodial account like Acorns Early.
2. Greenlight App
- Available: Sign up here
- Price: Free 1-month trial, $7.98/mo after
Greenlight Card + Invest is an investment account that comes paired with a debit card for kids.
It’s easy to use and can double as a savings account for your teens. The app will teach you the basics of investing, how to trade ETFs, etc.
It works best if parents are involved in the process because it requires linked brokerage accounts from custodian banks or brokerages.
3. Stash Invest ($5 Bonus)
- Available: Sign up here
- Price: Beginner: $1/mo, Growth: $3/mo, Stash+: $9/mo
Stash is an all-in-one financial management platform, complete with investing, spending and banking functionality.
The app targets individuals just starting on their financial journey by making everything covered on the app accessible to all levels of financial literacy.
With time, the app aims to build up your financial skills and make you confident with your ability to manage and plan your money.
By signing up, you also can receive a $5 bonus for making your first deposit on the app.
Learn how to get free stocks and other sign up bonuses to add a jumpstart to your investments.
4. M1 Finance ($30 bonus)
- 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).
You can open a custodial IRA with the service which 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, as a free stock app.
Consider signing up for an M1 Finance custodial account or custodial IRA today.
5. UNest ($25 bonus)
- Available: Sign up here
- Price: $3/mo: Regular, $6/mo: Family
UNest is a new custodial account that allows parents to invest money for their kids for needs beyond just education but events like a new car, a wedding, vacation or anything else a minor might want some day.
UNest even offers a free matching $25 sign up bonus for opening an account and making an initial $25 contribution.
How Do I Talk About Investing with My Kids?
Broaching the subject of investing can be a tricky topic with kids, especially when they have so many competing priorities in their lives. But that’s nothing to worry about because having patience and showing them the importance of investing as a long-term endeavor go hand-in-hand.
Start by talking about investing regularly and like it’s a normal part of life. Demystify the topic and make sure it does happen as a one-off conversation. Continue to nurture their interest in the area by talking about stocks, the market or economic events at least weekly.
By making it a recurring subject of discussion, your kids will eventually take the bait and ask questions. If nothing else, they know by showing genuine interest in learning what you’re talking about, it’ll get you to quit mentioning it all the time!
Most kids want to engage and understand more about what you say. Therefore, emphasizing it regularly will lead to more fruitful conversations.
From there, you can talk about companies and the importance of investing in good ones you think will succeed.
To give you ideas about good companies to follow, consider subscribing to or using:
- stock newsletters
- stock picking services
- stock advisory services
- stock tracking apps
- stock news apps
- stock analysis apps
These will all be good places for them to start and learn about exciting companies making the news.
One great resource to consider is AskFinny. This personal finance tool makes learning about finances and investing fun for all ages by providing engaging quizzes, breaking down complex topics in easy-to-understand terms and upskilling teens and young adults interested in learning how to manage their money.
Consider signing up for a 7-day trial to see if it would make a valuable resource for you to teach your kids about personal finance.
You might also break down their favorite companies like McDonald’s, Starbucks, Netflix and other stocks for kids. Avoid using jargon where possible and instead speak to them with direct language they can understand.
By painting a full picture for them, you kids might have an easier time engaging in the conversation and following your overarching ideas.
With enough time, repetition and excitement, you can start to lure your children into the world of investing with ease and interest.
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.
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.