Investing for Kids: How to Give them a Head Start in Building Wealth Through Investments

by Ivy N. ·

Investing for kids should be a priority whether you have kids or are thinking of having them in the future. If you want to give your children a financial head start in life or if you’re searching for simple, yet effective ways to start saving for their future, I’ve compiled a small but mighty list on ways you can enhance the financial future of your children.

As a disclaimer, I’m not a financial advisor. However, everything I’ve listed below are accounts I either have for my own 9-year-old son or have researched. We personally participate in the first two saving strategies as a means to save for his future.

Custodial Account

A custodial account is also known as an UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transform to Minors Act). For this type of account, either a parent or grandparent (or other guardian) acts as the custodian of the account but the money in the account belongs to the child. I personally chose to open an account with Fidelity for my son since I already have a retirement and brokerage account with them.

The ease of navigating Fidelity’s site is also easy to me and the team is knowledgeable and friendly whenever I’ve needed to call to ask questions or needed any type of assistance.

There’s no minimum amount to open an account and anyone (i.e. family and friends) can contribute to the account which makes this a great way to start saving as well! Once the beneficiary turns 18, the custodian can transfer ownership of the account to them. You can use this account to invest in stocks, bonds, mutual funds, etc.

Lastly, there are some tax advantages for opening an UTMA/UGMA account as well. Taxes are based on the child’s tax rate which are usually lower than the custodian’s tax rate. Be sure to research exactly how your account may benefit from these tax breaks in the long run.

The Pros of Opening a Custodial Account

There are no (to low) minimums needed to open an account (i.e. Fidelity).
Taxes are based on the child’s tax rate which are usually lower than the custodian’s tax rate.
Kids can learn the basics of investing early and be a part of choosing stocks they’d like to own.
You can only withdraw money for the benefit of the beneficiary.
This can be a fun way for kids to learn patience and see their accounts grow year after year.

The Cons of Opening a Custodial Account

As an investment account, you may lose money.
Some companies may require a minimum investment. Do your research!
Once the beneficiary turns 18, they have will have full access to the account. If they’re not financially savvy, this could be a cause for concern.

529 College Savings Plan

If you want to get a head start on saving for your child’s educational future, consider investing in a 529 College Saving Plan.

This is an investment account that you can use to save money for the costs of higher education expenses.

Any family or friend can open an account for a beneficiary as long as the total contribution doesn’t exceed $520,000 (as of August 2021). Money can be used for books, room and board, tuition, fees etc. at an eligible higher education institution. Your child or beneficiary can use this money to attend a 2 or 4 year public or private school.

Also, If your child or beneficiary attends a trade school instead, this plan may cover some qualified expenses for this option as well.

In a nutshell, you can use the plan to any qualified college expense.

A really awesome tax benefit is that you won’t owe federal income tax on withdrawals as long as you use the money for qualified education expenses.

Another incentive of the 529 College Savings plan is that not only can you open this type of account for a child, you can also open it for an adult or for yourself to help pay for educational expenses if you decided to return to school later in life as well (of course, the earlier you open this account the better)!

If your child decides not to go to college, you can also change beneficiaries to a qualified family member (i.e. sibling, stepchild, 1st cousin of beneficiary, step-parent etc). Please read the guidelines for your particular plan to see who may qualify to benefit from this plan.

Please keep in mind that this is an investment account and you may lose money and it is not federally insured.

The Pros of Opening a 529 College Savings Plan

This money is strictly for qualified educational expenses (i.e. private or public school, housing, technology, books etc).
You transfer funds to another family member if the initial beneficiary doesn’t use it.
You can use a target-date fund as an investment strategy.
This account can be opened at any age (i.e. young child, teenager or an adult returning to school, etc).
Easy to deposit money into this account via check, bank draft or recurring transfer into the account.

The Cons of Opening a 529 College Savings Plan

As an investment account, you may lose money.
This account is not federally insured.
If using an advisor through the plan, fees may be expensive. However, using an advisor is not a requirement!

Roth IRA for Kids

If your child earns an income, opening a Roth IRA account is another investment option you should consider. I strongly recommend finding a brokerage account with no (or very low) fees in order to maximize savings and keep costs as low as possible.

Make this fun for your child by allowing them to invest in a few individual stocks that they may be familiar with. Stocks like Disney (DIS), GameStop (GME), Nike (NKE), Mattel (MAT) are a few companies that your kids may already be familiar with. By teaching them they can own a portion of a beloved brand, this may fuel their curiosity and desire of learning about investing early! Of course, investing in ETFs and/or Index funds is also a way that they can also invest in the full market to diversify.

Again, Fidelity is a great place to open a Roth IRA for kids. I personally opted to help my son invest in the Vanguard Total Stock Market Index Fund (VTI) after doing some independent research on this fund. This fund allows you to invest in the total US stock market which really appeals to me. Please do your own research before making any final decisions as I am not a financial advisor in any sense of the word. Here’s a great place to start! I’m simply a mom who’s learning as she goes to ensure my son has the best financial future with what I know and am learning along the way.

“The stock market is designed to transfer money from the active to the patient.”
Warren Buffett

The Pros of Opening a Roth IRA for Kids

This can be a fun way for kids to learn patience and see their accounts grow year after year.
It’s great way for income-earning kids to start saving for retirement.
Kids can choose the stocks they’d like to invest in based on their interests.

The Cons of Opening a Roth IRA for Kids

As an investment account, you can lose money.
Roth IRA contributions are limited.

These are only a few ways you can start your kids off with a way to save for their future. Whether you are willing and able to try any of these methods or not, it’s important that you do something to ensure your child has an age appropriate understanding of saving and investing.

What are some ways you’re saving and investing in your child’s future?