A long-term horizon is a key to investing success. Kids have this in spades. They will likely see a good return on their initial investment if they are willing to allow their money to remain invested for many years. As adults, watching their money grow can help them become better savers or investors.
These are some important things to remember about investing for children, such as which investments are the best and how to set up your child’s first brokerage account. This account is also known as a custodial or UGMA/UTMA account.
Choose a Type of Account
You must first determine which investment account is right for your children to get them started with investing. This decision will largely depend on their income.
- If your child doesn’t have taxable income or wages: Under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act (UGMA/UTMA), you can open up custodial brokerage accounts for your kids. The account will be initially in your name. However, once your child reaches 18 or 21, the account will be fully accessible to him or her.
- If your child earns taxable income or wages, you can open a custodial IRA for them. A Roth IRA is a great option for children. The contributions that your child makes will grow without tax. These contributions can be withdrawn at any time. The investment growth can also be used for retirement and first home purchase, as well as education.
Select The Right Broker
You can open any type of brokerage account for your children, but you must first find a broker. No account fees or minimum deposit are required for the best investment accounts. This allows your children to invest with a very small amount.
You should also consider the cost of the investments that your child will make. If your child wants to trade stocks, make sure the broker does not charge any trade commissions. Look for brokers that offer a wide range of low-cost index funds if your children want to watch their money grow.
Many brokers offer education content such as online investing tutorials or practice trading accounts.
Register The Account
It takes less than 15 minutes to open a custodial account for your child — either a standard brokerage account or a Roth IRA — and most brokers can do it online.
You can speed up the process by having all necessary information at your disposal. Your Social Security numbers, along with your dates of birth and contact information, will be required by the broker. Your employment information will likely be required. You should also be prepared to link another brokerage or bank account to transfer funds to the new account.
Your Child Can Help You Decide Where To Invest.
After the custodial account has been opened and is funded, the fun part begins: Investing.
Your children will have the ability to invest in individual stocks as well as mutual funds and index funds.
We recommend a two-pronged approach to get your children excited about investing.
Allow them to choose one or two stocks. Focus on familiar household names — even a small amount of brands that kids know will inspire them to invest.
Index funds can be used to build the remainder of your portfolio. We recommend that your child stop buying shares of individual stocks as they add more money to their investment account. Instead, focus on low-cost index funds (ETFs) and avoid investing in them. These funds provide much-needed diversification by pooling hundreds or more stocks into one investment. This allows your child to invest in many different companies at once.
To learn more about the investments your child will be able to choose from — and to decide which is most suitable — read our full guide to various types of investments.
After they have purchased their investments, they should make it a habit to check their earnings and losses every day and compare the small fluctuations with larger, long-term changes. This will encourage discussion and help kids become better investors.
A custodial account is the best place to begin if your teen asks about investing. You must be 18 to open a brokerage account using the most popular investment apps. Some states may require you to be older. You have the final say on where and how they invest.
Some of the most popular investment apps (such as Robinhood or Webull) do not offer custodial accounts. So you’ll want to do your research alongside your teen, explaining that if they want to start investing before the age of 18, they’ll have to do it through an institution that offers custodial accounts. After they turn 18, they will be able to decide whether they want to stay with the same brokerage or start their own.
Your own. This can also be a time to explain the benefits of opening multiple investment accounts for various purposes.
This post was written by All Seasons Wealth. At All Seasons Wealth, we provide expert advice and emphasize the importance of creating in-house portfolios to personalize your strategy for asset management, financial planning, and cash management. We utilize research and perform market analysis to provide you with financial planning in Tampa. No matter your needs, we can work with you to develop a consulting solution tailored to you.
Any opinions are those of All Seasons Wealth and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Past performance may not be indicative of future results.