Investing your money is important whether you’re young or old, and starting early has its advantages. But for minors, traditional investment options like stocks and mutual funds may not be available. Fortunately, there are several ways for minors to invest their money and work towards building wealth for their future.
1. Custodial Accounts
A custodial account is an investment account managed by an adult for the benefit of a minor. The account is opened in the minor’s name, but the adult acts as the custodian, managing the account until the minor comes of age. Custodial accounts can be set up as savings accounts, brokerage accounts or mutual funds.
2. UTMA/UGMA Accounts
Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts are similar to custodial accounts, but with more flexibility. UTMA and UGMA accounts allow for a wider range of investments, including stocks, bonds and real estate. When the minor comes of age, they gain full control of the account and can use the money for any purpose.
3. Roth IRA
A Roth IRA is a retirement account that allows after-tax contributions to grow tax-free. While minors under the age of 18 cannot open a Roth IRA on their own, they can have a Roth IRA opened on their behalf by a parent or guardian.
4. 529 College Savings Plan
A 529 college savings plan is an investment account specifically designed for future education expenses. Contributions grow tax-free and withdrawals for qualified education expenses are also tax-free. Parents, grandparents, or other family members can set up a 529 plan for a minor.
5. Educational Savings Account (ESA)
An Educational Savings Account (ESA) is similar to a 529 plan, but with more flexibility in terms of what the funds can be used for. Earnings grow tax-free, and withdrawals for qualified education expenses are also tax-free. Contributions to ESAs have an annual limit of $2,000.
6. CDs
Certificates of Deposit (CDs) are low-risk investments that minors can use to earn interest. CDs have a fixed term, offering a slightly higher interest rate than a savings account. However, funds are locked in for the duration of the term.
7. Treasury Securities
Treasury securities, including Treasury bills, bonds and notes, are backed by the U.S. government and considered one of the safest investments. Minors can invest in Treasury securities through a TreasuryDirect account, with the help of a parent or guardian.
8. Municipal Bonds
Municipal bonds are debt securities issued by state and local governments to finance public projects. Minors can invest in municipal bonds through a custodial account, but they may require a larger initial investment compared to other investments.
9. High Yield Savings Accounts
High yield savings accounts offer a higher interest rate than traditional savings accounts, allowing minors to earn more on their savings. Some high yield savings accounts require a minimum deposit to open and maintain.
10. Peer-to-Peer Lending
Peer-to-peer lending allows individuals to lend money to others in exchange for interest. Minors can invest in peer-to-peer lending through a custodial account.
11. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are companies that own or finance income-producing real estate. Minors can invest in REITs through a custodial account or UTMA/UGMA account.
12. Robo-Advisors
Robo-advisors are automated investment services that use algorithms to create and manage investment portfolios. Some robo-advisors offer custodial accounts specifically for minors.
FAQs
1. Can minors open their own investment accounts?
Minors cannot open investment accounts on their own. An adult must act as the custodian or open the account on the minor’s behalf.
2. What is the difference between a custodial account and a UTMA/UGMA account?
While both are managed by a custodian for the benefit of a minor, UTMA/UGMA accounts offer more flexibility in terms of investment options.
3. What happens to a custodial account when the minor reaches the age of majority?
When the minor reaches the age of majority, typically 18 or 21 depending on the state, they gain control of the account.
4. Can minors invest in stocks?
Minors can invest in stocks through a custodial account or UTMA/UGMA account.
5. Are there tax consequences for minors investing in accounts?
Yes, there may be tax consequences depending on the type of account and how the funds are used. It’s important to consult with a tax professional before making any investment decisions.
6. Can parents contribute to a Roth IRA on behalf of a minor?
Yes, a parent or guardian can open and contribute to a Roth IRA on behalf of a minor.
7. Can minors use their investment earnings for anything they want?
Depending on the account, earnings may be limited to qualified expenses, such as education costs.
8. Can minors invest in cryptocurrency?
Cryptocurrency investments are not recommended for minors due to their high volatility and lack of regulation.
9. How can parents help their children learn about investing?
Parents can discuss investment options with their children, encourage them to save money, and set up investment accounts for minors.
10. What is the benefit of starting to invest at a young age?
Starting to invest at a young age allows for more time for investments to compound, potentially leading to greater wealth in the future.
Conclusion
Minors have several investment options available to them, from custodial accounts to Roth IRAs and 529 plans. Financial education is key to making informed investment decisions, and parents can play an important role in teaching their children about investing. With patience and a long-term perspective, minors can work towards building wealth and securing their financial future.
