Teach your kids how to manage their finances at an early age. One way to do this is by introducing them to investment accounts. However, not all investment accounts are intended to be used by children. Fortunately, there are several investment accounts designed specifically for kids. In this article, we’ll explore the top 12 investment accounts for kids under 18 years old.
1. Custodial Brokerage Accounts
A custodial brokerage account is a type of investment account that allows parents to invest on behalf of their children. Parents assume control of the account until the child reaches legal age. At that point, the account is turned over to the child for them to manage themselves. These accounts usually have no minimum deposits or fees associated with them, making them a great option for parents looking to invest for their kids without breaking the bank.
2. 529 Savings Plans
A 529 savings plan is a tax-advantaged investment account designed for education savings. These accounts can be used to help pay for qualified higher education expenses, such as tuition, room and board, and textbooks. Contributions to a 529 savings plan are made with after-tax dollars, but earnings grow tax-free, and withdrawals used for qualified expenses are also tax-free. Some states offer tax incentives for residents who contribute to their state’s 529 plan. These plans have contribution limits that vary by state and can often be in excess of $300,000.
3. UGMA and UTMA Accounts
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are investment accounts that allow adults to make financial gifts to minors without the need for creating a trust fund. These accounts have no contribution limits, and funds can be invested in stocks, bonds, mutual funds, and other investment vehicles. Once the child reaches the age of majority, the account is transferred over to them.
4. Educational IRA
An Educational IRA, also known as a Coverdell Education Savings Account, is another tax-advantaged investment account designed for education savings. Contributions to an Educational IRA are made with after-tax dollars, and withdrawals used for qualified education expenses are tax-free. The contribution limit for these accounts is $2,000 per year, per child.
5. Roth IRA
A Roth IRA is an individual retirement account that allows for tax-free withdrawals in retirement. While these accounts are typically intended for adults who are earning income, there are no age restrictions for opening a Roth IRA. This means that parents can open a Roth IRA for their child as soon as they start earning income. Contributions to a Roth IRA are made with after-tax dollars, and withdrawals can be made tax-free after the age of 59 ½. Roth IRA contributions are limited to the lesser of 100% of earned income or $6,000 per year for those under 50 and $7,000 per year for those over 50.
6. Traditional IRA
A Traditional IRA is another type of individual retirement account. Contributions to a Traditional IRA are made with pre-tax dollars, which means that contributions reduce taxable income. Withdrawals from Traditional IRAs are taxed as income in retirement. However, if the child is not earning income, they cannot contribute to a Traditional IRA.
7. Target-Date Funds
Target-Date Funds are a type of mutual fund that automatically adjusts asset allocation based on the target date, which is usually retirement. These funds are designed to become less risky as the target date approaches. Target-Date Funds are a great option for parents who want a hands-off approach to investing for their kids.
8. Index Funds
Index Funds are a type of mutual fund that tracks a specific index, such as the SP 500. These funds are designed to have low expense ratios and are a great option for parents who want to invest in the stock market without paying excessive fees.
9. ETFs
Exchange-traded funds (ETFs) are similar to mutual funds, except they trade like stocks on an exchange. ETFs usually have lower fees than mutual funds and are a great option for parents looking to invest in a specific sector or market index.
10. Dividend Reinvestment Plans (DRIPs)
A Dividend Reinvestment Plan (DRIP) is a plan offered by some companies that allows investors to automatically reinvest their dividends into more shares of the company’s stock. DRIPs are a great option for parents who want to invest in individual stocks for their kids.
11. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are a type of investment that allows investors to invest in real estate without actually owning property. REITs typically pay high dividends and are a great option for parents who want to invest in the real estate market for their kids.
12. Individual Stocks
Investing in individual stocks can be a great way to teach kids about the stock market. However, it’s important to do your research before investing in any individual stock. Parents should also educate their kids about the risks associated with investing in the stock market.
Frequently Asked Questions (FAQs)
1. At what age can kids start investing?
There is no minimum age for investing in the stock market. However, minors cannot open brokerage accounts on their own. Parents or legal guardians must open the account in the child’s name.
2. Is it safe for kids to invest in the stock market?
Investing in the stock market is inherently risky. However, teaching kids about investing early can help them understand risk and make better financial decisions in the future.
3. Are there any tax advantages to investing for kids?
Yes, there are several tax-advantaged investment accounts designed for kids, including 529 savings plans, Educational IRAs, and custodial brokerage accounts.
4. Is it better to invest in index funds or individual stocks?
It depends on your investment goals and risk tolerance. Index funds are generally less risky than individual stocks but may have lower returns. Investing in individual stocks can be riskier, but the potential for higher returns is greater.
5. Can kids invest in real estate?
Yes, kids can invest in real estate through Real Estate Investment Trusts (REITs). These investments allow investors to invest in real estate without owning property.
6. Can kids open a Roth IRA?
Yes, there are no age restrictions for opening a Roth IRA. However, the child must have earned income to contribute to the account.
7. What is a DRIP?
A DRIP is a plan offered by some companies that allows investors to automatically reinvest their dividends into more shares of the company’s stock.
8. Can minors invest in mutual funds?
Yes, minors can invest in mutual funds through custodial brokerage accounts or UGMA/UTMA accounts.
9. Can parents transfer a custodial brokerage account to a 529 savings plan?
Yes, parents have the option to transfer funds from a custodial brokerage account to a 529 savings plan. However, this transfer may have tax implications, so it’s important to consult with a financial advisor before making any transfers.
10. Is it safe to invest in REITs?
As with any investment, there are risks associated with investing in REITs. However, REITs are regulated by the SEC and must meet certain requirements to qualify as a REIT.
Conclusion
Teaching your kids the value of investing early on can set them up for a successful financial future. With so many investment options available, parents can choose the best account that meets their goals and risk tolerance. It’s important to educate kids about investing risks and benefits to help them make informed financial decisions in the future.
