The record-breaking debt Americans currently have is enough to make anyone think about saving and investing more.
And if you have a young child in your life, you might be thinking about helping them start investing now, so they can avoid the burden of debt when they’re grown up.
But investing is complicated even for adults, so it’s tough to figure out the best way to start building wealth for the little ones in your life.
That’s why we’ve created a list of the best investment accounts for kids, depending on your savings goal.
Whether you want to help your little loved ones start building their nest egg for retirement, save up for college, or just give them a financial boost to spend on their hopes and dreams, there’s an investment account on this list that’s perfect for any child.
How to Get Kids Interested in Investing
Most Americans don’t have the personal finance knowledge or the means to build wealth in the way you imagine for the children you love.
In fact, 56% of Americans have less than $5,000 in their savings account. That’s barely enough to cover a few months of expenses in the face of the unexpected.
Your investment gifts to your favorite kids will give them a head start on having a bigger rainy day fund and the financial means to live the life they dream of — even into retirement.
But to turn that gift into a lifetime of financial opportunity, they’ll need some investment know-how of their own.
It can be really difficult for young kids to grasp the concept of investing since it’s not something they can easily hold or see in action. But taking the time to make it click for them will make your investment in that child’s future pay off for years, or even decades.
The easiest way to get kids interested in investing is to make it a tangible concept. Talk to them about how you use money, even when they’re little. That way, they’ll always be comfortable with the topic.
When the kids you love are a little older, you can do a simple DIY investment game to help them see just how powerful investing is. Give the child a small sum of money, say, $5, and tell them if they keep it in their piggy bank for a week, you’ll give them an extra dollar. If they keep it for two weeks, they can have two extra dollars, and so on.
You can adjust this game to work with any sum of money or any time frame, depending on how old and how interested the kids are.
For your littlest loved ones, you can make it as simple as offering them one cookie now, but two cookies if they can wait until later.
When you’re giving an investment gift to a kid you love, you can also make it seem more real to them by including a personalized note or message about why you wanted to make this investment gift.
That helps them see why investing is important, and it’s a special memory of you that they can treasure into adulthood.
UGMA Investment Account: Best for Any Investment Goal
Uniform Gifts for Minors Act (UGMA) investment accounts are one of the most flexible and least restrictive ways to invest in a child’s future.
When a child is old enough, they can use the money in their UGMA account for anything they want. It’s not like other investment account options that require you to use funds to pay for college tuition or a list of qualified expenses.
The kids you invest in can certainly use your gift to pay college tuition, but they can also do so much more.
Maybe they want to start their own business because they have a great idea for a new type of app or want to spend their 20s renovating a fixer-upper. Or maybe they want to backpack through Europe or spend a year writing the next great American novel.
No matter what the kids you love are dreaming of, your contribution to a UGMA account can help them do it.
There’s also no penalty for withdrawing funds early if they’re used for the benefit of the minor. If they head off to college early or get a once-in-a-lifetime opportunity to travel abroad, they can have the means to do so even if they’re not quite 18 yet.
Considering that the average American is $51,900 in debt, you can see how a no-strings-attached investment account can give the kids you love a huge financial head start compared to their peers.
Early Bird’s UGMA accounts are set up so that every child only needs one.
Anyone who loves them and wants to invest in their future can do so without creating a separate custodial account. In a UGMA account, each person can give up to $16,000 annually without worrying about the gift tax.
Every aunt, uncle, grandparent, and second cousin who wants to make a contribution can put it in a single account for the child.
They can even leave a special video message along with it.
529 Savings Plan: Best for College Savings
A 529 savings plan is one of the easiest and most common ways to help the children you love save for college tuition and other related expenses.
And since private college tuition has increased by 144% since 2001 and shows no signs of stopping, it’s smart to start saving early.
It gets even smarter when you realize that the average family only saves $27,788 for college by the time the oldest child is 18. That’s not enough for a single year at most private colleges.
529 plans work similarly to a Roth IRA, where contributions grow with no taxes but are only withdrawn under a certain set of rules.
Some of these rules vary from state-to-state, as each state has its own version of the 529 plan.
You can still invest in a 529 plan from any state, even if you or the child who will benefit from the 529 plan doesn’t live there.
The key thing to know is that you can only use 529 plans for qualified educational expenses.
That used to just mean tuition and books and a few other things, but recently the accepted expenses expanded to include student loan payments and private school tuition for grades K-12.
When you make a withdrawal for one of these qualified expenses, it’s tax-free. Non-qualified expenses will not only be taxed but also have a 10% penalty fee applied.
Custodial Roth IRA: Best Long-Term Investment for the Kids You Love
You may already have a Roth IRA of your own, and custodial Roth IRAs are similar. You’re just giving the kids in your life a huge head start on saving for retirement (or even for college).
Thanks to the compound interest of Roth IRAs, the earlier you start investing, the more wealth the kid will have by the time they retire. As in, you can help the kids you love retire as millionaires, literally.
If you started saving just $2,000 a year for your favorite child starting when they’re 15, they’ll be a millionaire by age 67. That’s almost 10 times the average IRA balance of $123,973 — quite a head start for any child’s future. However, it’s important to note that you can’t save more each year than the equivalent of your child’s annual earnings.
Custodial Roth IRAs are funded with after-tax dollars, and that money is initially taxed at the child’s lower tax rate, which is a big plus to this type of account.
Each Roth IRA has a maximum contribution of just $6,000 in 2020, so it’s a much lower cap than some other investment options. But since it just takes $2,000 a year to set the kids you love on track to be a millionaire, that limit shouldn’t pose too much of a problem.
As we mentioned, it’s really important to keep in mind that with custodial Roth IRAs you can only contribute as much as a child has earned that year. So even though the maximum contribution is $6,000, if the child only earns, say, $1,000 working a part-time job, then you can only legally put $1,000 into that account.
Because of this, this type of investment account doesn’t make a lot of sense until the child is older.
Another potential downside is that Roth IRAs are a real long-term investment. There is a 10% penalty for withdrawals before age 59 ½, unless the funds will be used for qualified educational expenses. And when you withdraw early, even for educational reasons, you’ll have to pay taxes on earnings — the tax-free benefit only kicks in when the beneficiary reaches 59 ½.
Keep in mind too that custodial IRAs can be a little hard to find. Not every institution offers them, so you might have to look around to find the right one.
UTMA Brokerage Account: Best for Real Estate Investments
Uniform Transfer to Minors Act (UTMA) brokerage accounts are essentially the same as UGMA accounts, but you can include more types of assets.
Where UGMA accounts only allow cash contributions, UTMA accounts can include real estate, fine art, and even royalties and patents.
The most likely use for this type of account as an investment option for kids is gifting real estate. This could be a condo, undeveloped land, or even a house that you want to keep among the people you love.
Real estate might seem like a strange investment for kids, but it can be a huge leg up for the child’s future. The median age of US home buyers is now 47, so imagine the money and hassle the kids you love will save having their very own real estate before they graduate college.
On top of that, the average mortgage debt in the US is over $202,000. That’s a huge burden you can help the children you love avoid.
Real estate can also help the idea of investing become much more real to kids. They can see, touch, and enjoy a house, so it makes intuitive sense to them that you would want to take care of and hold on to it.
Other Investment Accounts for Kids
While these are some of the most impactful investment options for the kids in your life, there are plenty of other ways you can give them a financial head start too.
Here are some alternatives:
- CD ladder: This investment tactic works by investing in certificates of deposit that mature at different intervals and reinvesting the earnings when they become available. Ideally, you’ll have a CD mature each year, at which point you can reinvest or use the earnings for something the child you love needs.
- Traditional savings account: It doesn’t get much simpler than a regular old savings account, but it’s not the smartest investment for a child’s future. The average interest rate on a savings account is just 0.05%, so while you may find some that are higher, another type of investment will likely have a bigger payoff.
- Money market account: A money market account typically has a higher interest rate than a traditional savings account, but not by much. The current average is just a little higher than a savings account, at 0.07%. Money market accounts also allow you to make withdrawals via check on behalf of the beneficiary, so it’s a little more accessible. But the payout won’t be as high.
Start Investing for the Kids You Love Today
Giving the children you love a head start on building wealth is one of the best gifts you can give for their future. Your financial gift can help them live out whatever they can dream of, whether that’s starting a business, owning a home, going to college, or traveling the world.
The best investment for kids is a UGMA account from EarlyBird.
There are no restrictions on how to use the funds, and with the EarlyBird app, everyone who wants to invest in the child’s future can contribute to a single account. They’ll even be able to leave a special video memory along with the gift, so you’re giving more than just cash.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.