It’s natural to want to leave the world a better place than we found it. And if we want to invest in the future, the best way is to invest in the children in our lives — after all, they are the future.
But, there are a lot of investing options out there and it can be difficult to decide which one will set your loved ones up with the best possible outcomes.
Stocks are a popular investing opportunity for adults, so you may be wondering if they’re a worthwhile way to invest in kids.
In this article, we’ll walk you through everything you need to know to make the right decision for the children in your life. You’ll learn how to buy stocks for kids, why you should consider it, how to get started, and more.
Can You Buy Stocks For Kids?
Buying stocks for the kids in your life is a great way to get them excited about finances and help them to prepare for their future.
Plus, because of their young age, investments for kids have long time horizons. Since their money will be spending more time in the market, it can mean a much larger impact on their financial future, thanks to the magic of compounding.
But you might be wondering whether kids can actually buy stocks the same way an adult can. The answer is: Sort of.
Brokerage firms generally require that individuals be 18 years of age or older before opening a brokerage account. So you won’t be able to just open a normal account in your child’s name and start buying stocks.
However, there are plenty of options designed specifically for kids to start investing (or for parents and other loved ones to invest on their behalf).
Each option comes with unique characteristics and rules. Make sure you know what you’re getting yourself into before choosing the right type of investment account for the child in your life.
How Do You Give Stocks to Kids?
Brokerage firms generally require that someone be at least 18 years of age to open an account. As a result, you likely can’t just open a regular investment account in your child’s name to buy stocks. But there are plenty of alternatives.
Here’s a quick breakdown of four of the most popular options:
A custodial account is an investment account that an adult opens on behalf of a young person. The adult who opened the account maintains control of it until the child reaches adulthood, but the child is technically the account’s owner.
The adult can’t withdraw funds except under special circumstances. And when the child turns either 18 or 21 (depending on the state), the account automatically transfers to their control. In a custodial account, you can buy a variety of types of securities, including stocks.
There are two types of custodial accounts:
- Uniform Transfers to Minors Act (UTMA) Account: A custodial account that can hold just about any type of asset, including real estate
- Uniform Gifts to Minors Act (UGMA) Account: A custodial account that can only hold financial assets of cash, securities, and insurance policies.
EarlyBird is an UGMA account that adults can create for the children in their lives to save and invest for the future. EarlyBird is different from other custodial accounts in that it focuses on collective investments, where all of the loved ones in a child’s life can contribute to the same account.
EarlyBird’s app makes it simple to contribute. It also allows loved ones to leave a video message when they send a gift, making the contributions personal and timeless.
A 529 plan is a college savings account where you can invest money for a child’s education and allow it to grow tax-free. Then they can spend it on education-related expenses without paying taxes on the money.
While 529 plans can be an effective way to invest for a child in your life, they don’t allow you to buy individual stocks. You can only choose an investment portfolio.
It’s also important to note that the money in 529 plans can only be used for educational expenses. Unlike an UGMA, this type of account isn’t ideal for funding other goals for your loved ones.
Individual retirement account
An individual retirement account (IRA) is a tax-advantaged retirement account. Anyone who has earned income throughout the year can contribute to an IRA and invest the money within the account however they choose.
Anyone can contribute up to $6,000 per year to an IRA account, as long as they’ve earned income.
You can put money into a child’s IRA on their behalf as long as the child has earned income. But keep in mind that contributions can’t exceed the amount of earned income in a year.
So if a child earns $4,000 in 2020, you can contribute up to $4,000 to their account and use it to buy stocks and other securities.
There are two types of IRAs to choose from:
- Traditional IRA: Contributions are tax-deductible, and then the child will pay taxes on the money when they withdraw it during retirement.
- Roth IRA: Contributions are made post-tax, and then the money can grow tax-free, and the child can withdraw it tax-free during retirement.
Your own account
If you want to buy stocks for a child in your life but prefer to maintain ownership and control of the account, you can use your own brokerage account to buy the stocks, and invite them to help you choose them.
Then you can either sell the stocks later and give the child the money, or you can transfer the stock to their account when they’re older.
Of course, with this method, it can be difficult to maintain a clear view of what stocks are meant to be for the child in your life vs. part of your normal portfolio — especially if you want to continue adding to their stock investments over time.
5 Life-Changing Reasons to Buy Stocks For Kids
You may not have considered buying stocks for your kids or for the other young people in your life. But getting kids started with investing at a young age is an excellent way to prepare them for the future in more ways than one.
Teach them basic financial literacy
Financial literacy is an understanding of basic financial skills and concepts. And it’s one of the most important predictors of future financial outcomes.
Yet knowledge of basic financial topics is actually decreasing. And it’s decreasing the most among Americans ages 18–34.
By getting the children you love involved with investing at a young age, you’re helping them to build financial skills that they’ll be able to use forever. And considering many people still don’t understand the stock market in their later years, the child will have a huge head start.
Get them excited about finances
Many people struggle to get excited about finances. It’s rarely a topic of conversation during childhood. And by the time people start paying attention to their finances, it’s often because they have responsibilities like monthly bills and debt to pay off.
But as a kid, buying stocks can feel exciting. Children have less skin in the game, and no financial burdens to dull their excitement.
By inspiring this excitement around money at a young age, you may just help them to maintain that excitement throughout their lives.
Help them pay for college
A college education is likely to be one of the most expensive financial goals most children will face in the early part of their life. The cost of college has doubled over the past two decades, with the average cost of an in-state four-year tuition coming to roughly $25,396 per year.
This means that over a four-year period, a child is likely to spend more than $100,000 on their college education. And numbers are even higher for private universities.
In a time where young Americans are burdened with more debt than ever, buying stocks to grow your loved one’s college savings can be an effective way of helping them to avoid decades of paying off student loans.
Contribute to their future success
Being an adult is expensive, and unfortunately, most people are unprepared for the financial burden. These days, many households are saddled with debt from credit cards, loans, lines of credit, and more, even if they didn’t take on a hefty student loan debt.
By contributing to an investment account on behalf of the children in your life, you’re making a meaningful contribution to their future. With money in the bank, they’ll be able to focus on going after their dreams rather than struggling to make ends meet.
Whether it’s opting for an unpaid internship or choosing to launch their own startup, knowing they have financial options can encourage them to chase their passions rather than settle for a steady paycheck.
Get a head-start on retirement savings
Thinking of retirement when a child is still living at home might seem like overkill, but those who start saving early are rewarded.
Thanks to compound interest, saving just a small amount per month early in life is far more effective than saving a much larger amount each month, but waiting until you’re closer to retirement.
If you contributed just $100 to a retirement account each month during ages 15–25, your loved one could have more than a quarter of a million dollars by age 65. And that’s without contributing another dime after the age of 25.
What Are The Best Stocks to Buy For Kids?
Ready to get started buying stocks for the child in your life? Here are some tips to help you:
Choose between stocks and funds
When you start investing for your loved one, you’ll have to decide whether to invest in an individual stock, or a fund that represents a larger snapshot of the market.
Opting for a combination of the two can help keep the child interested, while also creating a more well-diversified portfolio.
When deciding which way to go, it’s important to consider how much you plan to invest and what your goal for the money is.
Are you investing just a small amount for the goal of getting your kids interested in finances? If so, buying an individual stock might make sense.
But if you’re going to be contributing a large amount of money over time to help set up your loved one’s financial future, then a more diversified stock portfolio that includes index funds or mutual funds should be preferable.
EarlyBird’s custodial accounts focus on this holistic investment approach.
When someone signs up for an Earlybird account on behalf of a child in their life, they’re given the option of five different ETF portfolios ranging from conservative to aggressive. Then anyone who wishes to help contribute to that child’s future can deposit money into the same portfolio, ensuring their investments always stay well diversified.
Involve the child in the investment decision
One of the best reasons to buy stocks for kids is that it helps to get kids excited about finances and investing.
If you’re setting up a new account or portfolio for a child, try to involve them in the decision-making process. You can present them with a handful of options and explain what they are and why you’ve chosen them, and they can help narrow it down.
One of the exciting features that EarlyBird offers is the ability to allocate up to 5% of a child’s account to value-based funds. Such funds include those made of companies who support saving the environment, women who lead, driving diversity, and having a positive local impact.
Involving the young person in their EarlyBird investment decisions allows them to be a part of the process, while also giving you the opportunity to teach them the importance of these topics, and how they can match their values to their financial choices.
Important Considerations For Buying Stocks for Kids
There’s a lot to consider before buying stocks for kids. Before getting started, you’ll want to make sure you’ve thought through factors such as taxes and account ownership.
Before choosing the type of investment account you’ll use to buy stocks for your kids, consider who you want to maintain ownership of the account.
If you use your own brokerage account to buy stocks, then you maintain control and ownership of the assets. You can sell the assets, or transfer them anytime you want.
But with custodial accounts and IRA in the child’s name, they technically own the account. You manage it, but you can’t take back the money you contribute, or change who will get the funds.
Access to money
Ask yourself how accessible you want the money in the account to be. In a normal brokerage account, you can sell the child’s stock anytime and withdraw the funds.
But with a custodial account or an IRA, there are more limits. And with some accounts, such as 529 college savings plans, you have to spend the money on qualified expenses or risk paying extra penalties.
There’s a gift tax on the transfers of valuable assets from one person to another. Even if you’re buying stock for your child or grandchild, you must file a gift tax return if you contribute more than $15,000 in a single year.
You likely won’t have to pay gift taxes, however, since there’s a lifetime exemption of $11.58M. So, you won’t be subject to gift taxes until you’ve gifted more than that amount over your lifetime, but you’ll still need to file the return.
Unearned income taxes
A child may have to pay taxes on the money they earn from any stock you buy for them. If a child earns more than $2,200 in interest, dividends, and other unearned income, they may have to pay taxes.
You may instead be able to choose to report these earnings on your own tax return to avoid filling out a child tax return. And keep in mind that if you buy stocks for your kids in your own brokerage accounts, the earnings will be considered yours and you’ll pay the capital gains tax on them at your tax rate.
Children can’t open their own brokerage accounts. But there are plenty of other options available to get started with buying stocks for the children in your life.
There are plenty of factors you’ll have to consider, such as the type of account you want to open, how you should maintain ownership of the account, and which stocks you’ll buy.
Investing at a young age can help prepare the children in your life financially for the future, as well as get them excited about finances. Custodial accounts like the ones EarlyBird offers are a great way to get started.
Download EarlyBird on the app store today to start investing in the kids you love.