Investing is not just for adults with a fat pocket. Even minors can start investing in different types of investment accounts. In fact, investing at a young age has plenty of benefits, it can help grow wealth, build financial literacy skills, and teach important life lessons about money. In this article, we will discuss the best 12 investment accounts for minors.
1. UGMA/UTMA Accounts
The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) allow adults to set up custodial accounts for minors. These accounts are managed by an adult custodian until the minor reaches adulthood, typically 18 or 21, depending on state law. The account can invest in stocks, bonds, mutual funds, and more.
2. 529 Plans
529 plans are college savings accounts that allow parents or guardians to save for a child’s education expenses. These accounts offer tax advantages, and some states offer matching grants or scholarships. The funds can be used for tuition, books, and room and board.
3. Custodial Roth IRA
A custodial Roth IRA is similar to a UGMA or UTMA account but with added tax benefits. The contributions to the Roth IRA are made with after-tax dollars, but the withdrawals are tax-free if conditions for qualified distributions are met. The minor must have earned income to contribute to a custodial Roth IRA.
4. Coverdell Education Savings Accounts
Coverdell Education Savings Accounts are another education savings option. The contributions are made with after-tax dollars, but the withdrawals for qualified education expenses are tax-free. The funds in the account can be used for K-12 or college education expenses.
5. Brokerage Accounts
A brokerage account is a taxable investment account that minors can use to invest in stocks, bonds, and other securities. The account is managed by an adult until the minor reaches the age of majority, and the adult will then transfer the account to the child.
6. Direct Stock Purchase Plans
Direct Stock Purchase Plans (DSPPs) allow minors to purchase shares of stock directly from a company. The account can be set up with a small initial investment, and the stock can be purchased over time. DSPPs offer a way for minors to invest in the stock market without the need for a broker or financial advisor.
7. Exchange-Traded Funds
Exchange-Traded Funds (ETFs) are a type of investment fund that can be bought and sold like a stock. ETFs offer low fees and allow minors to invest in a diversified portfolio of stocks or bonds. ETFs trade on an exchange like a stock and can be bought through a brokerage account.
8. Robo-Advisory Accounts
Robo-advisory accounts use algorithms to manage a portfolio of investments. Robo-advisory accounts are ideal for minors who want a hands-off approach to investing. The account can be set up with a low initial investment, and the portfolio will be automatically rebalanced as needed.
9. Treasury Securities
Treasury securities are a type of bond issued by the U.S. government. Treasury securities offer a reliable and predictable rate of return that is free from state and local taxes. Minors can purchase treasury securities through a brokerage account or directly from the U.S. Treasury.
10. Mutual Funds
Mutual funds are a type of investment fund that pools money from multiple investors to purchase a diversified portfolio of stocks or bonds. Mutual funds offer a low initial investment and professional management. Some mutual funds offer tax advantages.
11. Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) are a type of investment fund that invests in real estate properties. REITs offer a way for minors to invest in real estate without the need for a large down payment, and they offer high yields and low fees.
12. Savings Accounts
Savings accounts are not considered investments, but they are an important part of a minor’s investment portfolio. Savings accounts offer a safe place to store money and earn interest. Some savings accounts offer high yields and no fees, making them a great way to start building wealth.
FAQs
1. What is the best investment account for minors?
The best investment account for minors depends on their financial goals and investment style. Some of the best investment accounts for minors include UGMA/UTMA accounts, 529 plans, and custodial Roth IRAs.
2. Can minors invest in the stock market?
Yes, minors can invest in the stock market through a UGMA/UTMA account, brokerage account, DSPP, ETF, or mutual fund.
3. Are there tax advantages to investing as a minor?
Yes, some investment accounts like 529 plans, custodial Roth IRAs, and some mutual funds offer tax advantages for minors.
4. Can minors invest on their own, without an adult?
No, minors cannot invest on their own without an adult custodian or guardian managing the account.
5. Can minors open a bank account?
Yes, minors can open a bank account with an adult as a co-owner or joint account holder.
6. Can minors have a credit card?
Minors can have a credit card only if an adult cosigns the account. The adult is responsible for making payments on the account.
7. Is it safe for minors to invest in the stock market?
Yes, investing in the stock market carries risks, but if done responsibly and with education, minors can safely invest in the stock market.
8. Can minors invest in cryptocurrencies?
Minors cannot invest in cryptocurrencies directly, but they can invest indirectly through investment funds that hold cryptocurrencies.
9. How much can minors contribute to investment accounts?
The amount minors can contribute to investment accounts varies by account type and is subject to annual contribution limits.
10. Can investment accounts for minors be used for purposes other than education?
Some investment accounts like UGMA/UTMA accounts and brokerage accounts can be used for any purpose, but 529 plans and Coverdell accounts are restricted to education expenses.
Conclusion
Investing at a young age can help minors build wealthy, financial literacy skills, and important life lessons about money. The best investment account for minors depends on their financial goals and investment style. The top 12 investment accounts for minors include UGMA/UTMA accounts, 529 plans, custodial Roth IRAs, brokerage accounts, DSPPs, ETFs, robo-advisory accounts, treasury securities, mutual funds, REITs, and savings accounts.
