Investing is an important part of personal finance — for both children and adults.
But the investment account types available to children are different from those for adults.
With a few exceptions, children will generally need to use a custodial account to invest. This essentially means that a parent or guardian will control the account until the child becomes a legal adult.
There’s a lot to learn about options for an investment account for kids. This comprehensive guide goes over all the most popular account types, from custodial accounts to 529s to Roth IRAs.
How Old Do Children Need to Be to Start Investing?
An individual typically needs to be 18 years old to buy stocks and most other investments. This is because most stockbrokers require a minimum age of 18 to open an account.
The same is true of most other assets, like real estate and cryptocurrency.
The only investments that a child could easily buy directly are physical assets, such as collectibles, coins, or precious metals.
Fortunately, there’s an easy workaround. Any legal adult can create a custodial investment account for a child. The account is set up by the adult, but the beneficiary will be the child. And once that child becomes an adult, they gain full access to the account.
Investing with custodial accounts
A custodial investment account is a financial tool that adults can use to help save (and invest) for children.
An adult (the “custodian”) can set up a custodial account and assign the child as the “beneficiary.” As the custodian, the adult is responsible for managing the account, transferring in funds, and selecting investments.
Once the beneficiary reaches the age of majority in their state (18 in most states; 21 in a handful), they gain full access to the account. At this point, the custodian no longer has access to the account, and the child (now an adult) can use the money however they see fit.
Custodial accounts are the best way for children to invest. Once the account is set up, the child can contribute their own money (with the help of an adult). Or others can gift money to contribute to the account.
There are different types of custodial investment accounts, and each is a bit different in how they work. Some are designed for general-purpose savings. Others are made for education expenses. And some are for long-term retirement savings.
But all custodial accounts share some similarities:
- An adult must set up the account
- Children will gain access to the account once they are a legal adult
- Investments can be made from within the account (stocks, mutual funds, ETFs, etc.)
The section below will cover all the different options for an investment account for kids — all of which are different forms of custodial accounts.
What Are the Different Investment Accounts for Kids?
There are two broad categories of investment accounts for children.
- Accounts for children without income (general purpose and college savings accounts)
- Accounts for children with income (retirement accounts)
Here is a brief overview of all the different accounts available.
UTMA/UGMA accounts: Designed for adults to be able to easily gift money and investments to children. Funds can be used for any purpose.
529 accounts: A college savings account that offers tax benefits if funds are used for college specifically. Funds must be used for qualifying educational expenses (with a few exceptions).
Youth brokerage accounts: A basic brokerage account that can be set up for teens (usually for those 13 or older). Funds can be used for any purpose.
IRA retirement accounts: A retirement account designed to help save for retirement. Funds must be used in retirement; there may be penalties for early withdrawals.
Let’s take a closer look at these investment options in more detail.
Investment Accounts for Children Without Income
Most options for kids investment accounts will be custodial accounts designed for children of any age. Children do not need to have any earned income to use these accounts — they’re mostly set up for loved ones to contribute money on behalf of the child.
With that said, children can certainly contribute their own money (with the help of a parent).
There are a few main account styles to consider, which are explained in detail below.
UGMA and UTMA accounts are both forms of custodial investment accounts for children. There are some differences between UGMA and UTMA accounts, but the basics are similar. The main difference is that a UTMA account can contain physical assets, like real estate, while a UGMA account is mostly for assets like stocks, bonds, mutual funds, and index funds.
UTMA stands for the Uniform Transfers to Minors Act.
UGMA stands for the Uniform Gifts to Minors Act.
These accounts are designed for adults to set up an investment account for a child. The child is the beneficiary and technically owns the account.
Once the child reaches the age of majority, control of the account is transferred to them. At this time, they are free to do whatever they want with the funds.
Because there are no restrictions on what money can be used for, these custodial investment accounts are a great choice for general savings.
Money could be used for a round-the-world trip, a down payment on a home, or education expenses. For loved ones who aren’t sure of the child’s future plans, this flexibility is a significant benefit.
There’s also no limit to how much you can contribute to these accounts. With that said, contributions of over $16,000 per year may be subject to gift tax. And neither the child nor the contributor is not subject to any sort of income restrictions.
Opening a UGMA account using EarlyBird
EarlyBird is an investment platform and app that helps adults invest in the children they love.
Any adult can open an EarlyBird account and assign any child as the beneficiary. EarlyBird accounts are structured as a UGMA account and are very simple to use.
The power of EarlyBird is that it makes investing for children simple. You can sign up and answer some questions about goals, and then EarlyBird will recommend a prebuilt investment portfolio consisting of stock index funds, bond funds, and even alternative assets like cryptocurrency (if desired).
You don’t have to pick stocks or be an investment expert to use EarlyBird. You just need to open an account, contribute what you can, and watch the child’s investments grow.
The other primary benefit of EarlyBird is collective gifting.
The EarlyBird app makes it simple for anyone to contribute to the child’s investment account. Friends, grandparents, parents, and loved ones can all contribute collectively. You can even attach short videos and notes to your gifts, so the child can receive a thoughtful message from the giftees.
And because EarlyBird accounts are UGMA accounts, that child can use the money for any purpose once they become an adult.
EarlyBird helps you invest in the children you love. You can get started in just a few minutes.
A 529 account is a type of custodial account specifically designed to be used as a college fund. It offers tax benefits for saving for college.
Anyone over age 18 can open a 529 and assign a beneficiary (who can be a child).
You can contribute money to a 529 plan and invest it in certain assets. Money can grow on a tax-deferred basis. And if money is withdrawn to be used for qualifying educational expenses, the investment growth is tax-free.
For example, if you contribute $5,000 to a 529 and it grows to $10,000, your child could use the entire $10,000 on tuition and would not owe any taxes. You would not owe any taxes, either.
529s are state-level plans, so each state has slightly different rules. Also, the availability of different investments will depend on what provider the 529 is opened with.
A 529 offers more tax benefits than a custodial account. However, the downside is that 529s are not as flexible. If the child doesn’t end up going to college, they may owe a tax penalty when they withdraw the funds.
Youth brokerage accounts
Some stockbrokers offer “youth accounts.” These are brokerage accounts that are usually designed for teens.
For example, Fidelity offers an account designed for teens ages 13 to 17. The account has banking functionality (debit card) and can be used to teach children about investing.
The details of these accounts vary, and not all brokers offer them.
Investment Accounts for Children With Income (Retirement Accounts)
For children and teens who have some amount of income, retirement accounts become an option.
Only “earned income” can be contributed to a retirement account. If someone earns $2,000 throughout the year, they can contribute up to $2,000 to a retirement account — but no more.
Importantly, the money contributed could come from someone else, as long as the child has legitimately earned money from a job or other income source.
For example, if a teen gets a part-time job and earns $2,000 over the summer, a parent or loved one could offer to gift the child $2,000 to contribute to their retirement account. This way, the teen could get an early start on retirement savings while still being able to spend the money they earned directly.
It’s important to note that money earned from gifts, allowances, etc., does not count as earned income.
Retirement accounts are designed to save for retirement. There may be penalties for early withdrawals, which is when funds are taken out before the child reaches retirement age.
These accounts offer powerful tax benefits — but they are not as flexible or versatile as something like a UGMA account.
Let’s break down the two different types of custodial IRAs.
Custodial Roth IRA
The custodial Roth IRA is typically the best choice for children and teens. It offers no upfront tax benefit, but withdrawals made in retirement are tax-free.
For example, if a 15-year-old contributes $2,000 of earned income and invests that in a stock market index fund earning 10%, that investment could grow to over $230,000 by the time the child turns 65. And importantly, they could then sell those assets and withdraw the entire $230,000, and they would pay zero in income tax or capital gains tax.
This graph depicts just how much that investment of $2,000 can grow in 50 years:
Individuals can contribute up to $6,000 of earned income per year to a Roth IRA.
As with IRAs in general, the funds are designed to be used in retirement, and there may be penalties for early withdrawals. However, there’s a workaround: After five years, you can withdraw the amounts you’ve contributed to a Roth IRA penalty-free (you can’t, however, withdraw any profits you’ve made without a penalty).
Because of this, some people use a Roth IRA for education expenses. But ultimately, the power of the Roth lies in tax-free, long-term growth. It’s best used for retirement savings.
Custodial traditional IRA
A traditional IRA is similar to a Roth IRA, with one big difference. A traditional IRA offers an upfront tax break. But the money you withdraw in retirement is subject to taxes.
For example, if you earn $25,000 in a year, you will be in the 12% tax bracket. If you contribute $1,000 to a traditional IRA, you will earn a $120 tax credit (12% of $1,000). But when you withdraw funds in retirement, you may need to pay taxes on your profits.
Because children don’t earn a lot of money, traditional IRAs usually don’t offer as much benefit as a Roth IRA. In fact, most children will be in the 0% tax bracket, which means a traditional IRA won’t offer any sort of upfront tax break. A traditional IRA also doesn’t offer the benefit of penalty-free withdrawals on contributions, like a Roth does.
In the vast majority of cases, a Roth IRA is a better choice for children.
How to Introduce Investing to Kids
Teaching financial literacy to kids is very important for building a bright financial future. And unfortunately, many school systems do not adequately address the topic.
The responsibility of teaching personal finance often falls on loved ones. And while investing is just one part of overall financial literacy, it’s a very important concept to explore.
Teaching kids about the stock market could involve a few different strategies:
- You could help the child sign up for an investment simulator game.
- You could open a custodial account and let them contribute a small amount of money to invest.
- You could mimic investing manually — telling the child if they save $5 for a year, you will reward them with $5 extra.
It’s also helpful to make investing relatable. This could mean investing in a company that the child loves.
It’s usually a good idea to invest in diversified stock market index funds. But when it comes to teaching, it can be powerful to invest a small amount in a specific company that the child knows.
After all, what kid doesn’t want to tell their friends that they “own Disney” or “invest in McDonald’s”?
Adults can benefit children the most by making investing fun, engaging, and interesting. It’s best to start slow with a basic introduction — and to be there if they have any questions.
For parents, it can also be helpful to bring in a loved one to help. If your child is in the phase of not wanting to take advice from Mom and Dad, maybe the cool aunt or the fun next-door neighbor can help introduce financial topics.
Kids investment accounts are typically a form of custodial account, meaning that a parent or guardian retains control of the account until the child is a legal adult.
But that doesn’t mean that kids can’t get started with investing early! In fact, the earlier they start, the more their money will have time to grow and compound.
For most families, setting up an account with EarlyBird will be the simplest way to start investing for children. The EarlyBird platform makes it easy to build a balanced portfolio of stocks, bonds, and even cryptocurrency — while offering the flexibility of a UGMA account.
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.