Watching a child grow should be a cherished part of life. However, part of watching them grow is preparing them to leave the nest.
We know a lot goes into preparing a young child for their future, but a huge part of that preparation is financial wellness. One way to do that is by making smart investments for them over time.
In order to do that, you’ll need to open some sort of investment account for a child in your life — and there are a variety of options at your disposal.
In this article, we’ll walk you through why we think investing is a smart move that will help you support the children you love, ways you can start investing on their behalf now, and our verdict on which type of account you should prioritize.
Why Make an Investment for a Child?
When it feels like there are many ways to contribute to your loved one’s future, why choose to make an investment?
While it might seem more exciting to give a child money or physical gifts, the long-term benefits of investment can’t be ignored.
By making an investment on behalf of a child in your life, you’re giving them a healthy head start as an adult. Over time, that investment contributes to their financial literacy and sets them up for success early in life.
Here are two huge benefits of investing for the children in your life:
Teach financial literacy and investing skills
When you make an investment on behalf of a child in your life, you open the opportunity to discuss with that child why you made this choice in the first place, and to get them excited about managing money that will one day be theirs to spend or invest as they wish.
While you could attempt to engage them through general conversations about building a nest egg, it won’t be nearly as effective as having them directly involved with their future investments, making it a lot easier to help them become financially literate at a young age.
Money habits are just like healthy eating habits or habitual exercise; they’re best built early on. By broaching the topic of money management with children, you’re contributing toward building those healthy habits.
Not to mention, frequently talking about money, investing, and wealth will help a child in your life gain confidence surrounding the topic.
When the time comes for them to take the reins and manage investments on their own, they’ll be savvy investors who will manage their money wisely.
Time is on your loved one’s side
By making a choice to gift an investment as opposed to cash or a physical gift, you’re allowing a child to harness the power of compound interest as that gift grows over time.
Your gift could contribute to a nest egg that helps a beloved child when they need it the most — right when they’re leaving the nest.
Consider this hypothetical.
Instead of spending $300 on a child in your life each year around the holidays, you invest that money instead. In ten years, you’ll have invested a total of $3,000.
Now let’s assume your investments experience an average annual rate of return of 8% (which is fairly reasonable for long-term investments in the stock market.)
If this compounds annually, your investment will be worth $4,993.65 at the end of ten years. That’s almost $2,000 of free money on only $3,000 invested!
EarlyBird aims to empower parents, grandparents, family, and friends to help set kids up for financial success by investing on their behalf.
It’s easy to get an account started. Once set up, friends and family can gift amounts of their choosing, contributing to a portfolio set up by the account owner.
How to Invest for a Child
Once you know that you're interested in getting started with early childhood investment, you have a few options to get started.
Kickstarting financial wellness
In order to kickstart your loved one’s financial wellness at a young age, you’ll need the type of investment account that doesn’t have a lot of restrictions. It should be one that becomes the child’s when they enter adulthood.
A custodial brokerage account is a financial tool that adults can use to save money for a child. The adult that opened the account controls the account as the custodian, until the child comes of age. But everything in the account legally belongs to the child.
When the child comes of age (usually 18 or 21, depending on the state), they take over the account and can invest or use the money however they wish.
There are two types of custodial brokerage accounts to consider, named for the laws that allow them:
- Universal Gifts to Minors Act (UGMA) account: This account allows for investments like stocks, bonds, and mutual funds.
- Uniform Transfers to Minors Act (UTMA) account: This account allows for investments outside of those included in an UGMA account, like real estate, art, or even cards.
If the goal is to set aside physical assets for your child (like old Aunt Agatha’s family home), an UTMA account is a good option. But, if your goal is to kickstart their financial wellness, an UGMA account may be your best option.
Those who invest with EarlyBird are investing in an UGMA account.
The account custodian has the option to choose from five fixed portfolios that range from conservative to aggressive.
- Conservative: Entirely made up of bond-based exchange-traded funds
- Aggressive: Entirely made up of equity-based ETFs
Once the custodian has selected the portfolio of his or her choice, anyone in that child’s life can contribute to it.
Gifts can also include a short note and video message, which can be shared with the child at the time of the gift, or at a later date when the account becomes theirs.
After your gift has been received, you’ll be able to view the total amount that’s been gifted to the child you love, as well as a total projection for how that gift will grow by the time that child is of age.
Lastly, when the child turns 18 or 21, the account becomes theirs, and they take over management of how funds are invested.
They can use that money to buy anything they might need or dream of — this type of account does not restrict how the funds are used once ownership is transferred.
Saving for higher education
If you do want to make an investment on behalf of a child in your life with restrictions as to how they can spend that money, there are a couple of different options available.
The first is a 529, or a qualified tuition plan, which allows loved ones to make investments on behalf of a child specifically to help with educational expenses.
Student loan payments and the cost of apprenticeships also qualify as education expenses, meaning this type of account can also contribute to them.
This account does have a few restrictions to consider:
- As we previously mentioned, the funds can only be used for educational expenses like college tuition or student loan payments. These expenses might also include things like tuition and fees, books, supplies and equipment, academic tutoring, special needs services for a special needs beneficiary and more.
- Recipients of these funds will get hit with a capital gains tax when they make a withdrawal to use funds outside of qualifying college expenses. Any gains are taxed at the custodian’s marginal tax rate.
- They will also pay a 10% penalty for using the funds for unqualified expenses.
- The named beneficiary has no legal rights to the funds in a 529 account, so management of the account falls on the custodian, and the beneficiary could change.
It’s never too early to start saving for retirement, and if your goal is to help a child in your life save for this specific life milestone, there are a couple of options available.
A custodial Roth IRA brings together the benefits of a custodial brokerage account and a traditional IRA. It’s an IRA that an adult holds on behalf of a child with an earned income.
You’re able to open this type of account on their behalf, and it’s passed along to them when they’re 18 or 21 to manage on their own, depending on the state you live in.
There are two main restrictions to consider with this type of account:
- The child in your life must be earning money. Earned income is defined by the IRS as taxable income or wages. This money comes from places like a W-2 job, or from self-employment gigs like babysitting or dog walking.
- There are contribution limits. The contribution cap for this type of account is currently $6,000, or the total amount the child earned for the year — whichever is less. If that child only earns $3,000 that year, you can’t contribute more than $3,000 to the account in their name.
But, that money compounds. Say a teenager in your life earns $4,000 this year working their first job as a local server on weekends. If they save $2,000 at a 5% interest rate, that money will have grown to $23,000 over the course of 50 years before they retire.
These options are a long game, though, and they won’t provide the same opportunities for financial education at a young age as something like an UGMA account would. It also will not provide them with a nest egg for early adulthood.
Earlybird Has What You Need to Start Investing in a Child You Love
EarlyBird simplifies the way loved ones can kick start the financial future of a child through a custodial investment account.
In addition to providing the means to help you make those investments for the children you love, EarlyBird keeps family members connected throughout those life milestones.
We do this by allowing you to equip each gift you make to your loved one with a short video that leaves a lasting legacy of love, like this one:
EarlyBird is well equipped to manage investments for your loved one. As a registered investment advisor (RIA), we partner with wealth management and financial planning experts to build investment offers that we’re confident will grow over time.
We offer fixed portfolios for you to choose from, built on expertly crafted ETF-based portfolios that consist of securities and bonds. These recommendations are customized based on a child’s age, investment goals, risk tolerance, and many other factors.
Accounts are held with a trusted partner and custodian Apex Clearing Corporation. They're a third-party SEC-registered broker-dealer and member of FINRA and Securities Investor Protection Corporation (SIPC).
Getting started is easy — you’ll first need to fill out some basic information on behalf of the child in your life, like name, date of birth, and social security number.
Then, you’ll need to select which portfolio best suits your investment goals based on your comfort levels and the child’s age.
All that’s left at this point is to tell family and friends about the account and monitor the health of your portfolio.
Making an Investment for a Child Early On is a Smart Choice
By choosing to give the gift of investment to a child you love, you’re making a positive impact they will feel for years to come.
If you’re just starting out with investing on behalf of a child, get started with an UGMA account.
They provide the most flexibility for friends and family and are readily available for the child to use at a time in their life when they need it most.
Get started today by opening an EarlyBird account. It’s a trusted solution that will help you start building future wealth for a child in your life today.
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.