Investing your time, energy, and love in children is vital for their development and well-being. But investing your money can also be incredibly impactful.
Investing early gives your money more time to grow. Every $1 that is invested for 65 years earning 10% returns will turn into over $490. That means that a single $1,000 investment for a newborn baby would be worth around $490,000 once that child reaches retirement age.
But investing for children is a bit different than investing for yourself. A minor cannot open a standard brokerage account. Instead, an adult must open one for them.
This comprehensive guide will cover how to open an investment account for a child — including information on account types, where to open, what information is needed, and more.
An investment account for children is a digital account that allows parents and loved ones to invest on behalf of children. The accounts make it possible to invest in stocks, bonds, ETFs, and potentially other assets, as well.
There are different types of accounts, but each typically must be set up and managed by an adult.
Children generally cannot open their own investment accounts until they become legal adults. Instead, an adult must open the account on behalf of the child. The child becomes the “beneficiary” of the account, while the adult is the “custodian.”
These special types of investment accounts are called custodial accounts.
To open an investment account for a child, an adult must be involved. The adult must open the account, select the investments, manage tax reporting, and continue to manage the account until the child reaches the age of majority. This is usually at age 18 but could be age 21 in select states.
With a custodial account, the child always owns the account — but they won’t actually have control over it until they reach the age of majority.
A legal adult must be involved to open investment accounts for kids. In most cases, this doesn’t necessarily need to be the parent — other family members and trusted friends can also typically serve as the account custodian.
To open a children’s investment account, here are the basic steps:
Each account has a different tax treatment and a different intended purpose. See a full overview of the different account styles below.
At this point, you should also transfer in some money to fund the account. As long as you stay under the tax-free gift limit ($16,000 per year), you won’t owe any tax, nor will you have to report it. Read more about custodial account taxes for more information.
The child can certainly be involved in decision-making if it’s age-appropriate — but ultimately, the custodian must make the investment selections and trades. We’ll give you an overview of the most common investment asset classes below.
Not all account types are open to children. Here’s an overview of some of the best types of accounts.
UGMA or UTMA accounts are two similar types of general-purpose custodial investment accounts. With these, the custodian opens and manages the account until the child reaches the age of majority.
Once the child becomes an adult, they gain full access to the account and can use the money for any purpose. Read about the differences between UGMA and UTMA accounts here.
529 accounts are specialized savings accounts designed to help families save for college. They offer tax benefits if funds are used for qualifying educational expenses.
Money that is put in a 529 can be invested and grow tax-free until withdrawal. Neither you nor the beneficiary will owe any capital gains tax if the funds are used for qualifying educational expenses.
The downside is that there are penalties if funds are used for anything other than education. For this reason, UGMA custodial accounts are more versatile than 529 accounts.
Coverdell Education Savings Accounts (ESAs) are another way to save for college. They offer tax-free growth as long as the funds are used for qualifying education expenses.
However, ESAs have lower contribution limits than 529s — you can only put up to $2,000 per year into an ESA. Plus, there are income limits, so higher-income families may not be able to contribute. Read about the differences between 529s and ESAs here.
Custodial Roth IRAs are a type of retirement savings account that offers tax-free growth. However, funds are designed to be kept in the account until retirement age, and there may be penalties if money is withdrawn early.
To contribute to an IRA, the child must have earned income from a job or business. Only earned income can be contributed — allowances and gift money does not count.
Overwhelmed by options? The UGMA custodial account is the simplest and most versatile option. It has no restrictions on what the money can be used for, making it the most flexible choice.
Once you select the type of account, your next step is to select a company to actually open that account with. This could be traditional brokers like Fidelity or Vanguard or more modern financial services companies like EarlyBird. Even some banks and credit unions may offer certain types of custodial investment accounts.
Here’s what to consider when selecting a provider for the new account:
Available account types: Does the company support the specific account type that you want to open?
Reputation: Does the company have a good reputation? You can check customer reviews to be sure.
Investment options: What can you actually invest in once you have the account opened? Some companies offer a wide range of investments, while others may be quite limited.
Fees: What fees does the company charge? This could include initial fees to set up the account, monthly service charges, trading/transaction fees, or fees associated with the specific investment products/funds.
Ease of use: Are the company’s services simple to use? Is there a smartphone app, and if so, is it well rated?
Looking for a simple and trusted place to open a child’s investment account? EarlyBird may be exactly what you’re looking for.
EarlyBird is a modern investing app and service that lets loved ones set up UGMA custodial accounts for children. Account setup takes just a few minutes.
Adults can collectively invest in the children they love by sending gifts directly to the child’s EarlyBird account.
No investing experience is required. When you sign up, you’ll answer a few questions about your investment goals and risk tolerance. Then, EarlyBird will recommend a prebuilt portfolio of diversified investments.
EarlyBird focuses on low-cost, simple index funds. You can invest in stocks and bonds, as well as alternative assets like cryptocurrency.
Because children’s investment accounts are custodial accounts, you will need the information for both parties (custodian and beneficiary). Here’s what you’ll need:
Custodian (the adult)
Beneficiary (the child)
Certain companies may require additional information to verify identity. For instance, you may be asked for your driver’s license number or even a scanned picture of your photo ID or passport.
Each broker will have a different process for account opening. But in general, here’s what it will look like:
Here’s an overview of the most common assets that you can invest in. Note that not all investment options are available in all accounts. Each account type, and each broker/manager, has a different selection of available assets.
Stocks: Stocks represent fractional ownership of companies. If you buy Amazon stock, you own a very small piece of Amazon. Most people who invest in stocks do so by buying diversified index funds, which are a way to invest in hundreds of companies all at once.
Bonds: Bonds are like loans in reverse. Companies and governments sell bonds to investors and promise to pay them back — with interest — after a certain period of time. Investors can buy individual bonds or invest in bond funds that own hundreds of different bonds.
Real estate: Real estate refers to physical houses or commercial property. When it comes to investing for children, the main method would be to buy real estate investment trusts (REITs), which are like mutual funds for real estate.
Cryptocurrency: Cryptocurrency is a type of digital currency — examples include Bitcoin (BTC) and Ethereum (ETH). Crypto can be a volatile asset class, so most experts recommend keeping it a small percentage of your overall portfolio.
Prebuilt portfolios: Some investment platforms (like EarlyBird) offer a simpler approach: Prebuilt investment portfolios with diversified assets. For example, you might select a portfolio that invests 80% in stock market index funds and 20% in bond market index funds.
Deciding what to invest in depends on several factors, including:
To open an investment account for a child, you must be a legal adult. You can then open a custodial investment account and assign the child as the beneficiary. From there, you can build investment portfolios for the child and continually contribute money when you can.
The easiest way to open a new investment account for a child is to use EarlyBird. EarlyBird makes it simple for family and friends to collectively invest in the children they love. No investing experience is required.