You want to give your kids the best possible start for their future. Somewhere between their ABCs and their first driving lesson, you should teach them the value of money. You can go further by opening a brokerage account for kids. This will help your child learn the ropes of investing in stocks.
Here’s how to open a brokerage account for your child so you can set them up for years of successful investing.
The Value of a Brokerage Account for Kids
Your kids must be at least 18 years old before they can open a brokerage account of their very own. But parents can open an account on their behalf. Opening a brokerage account for kids will offer several key benefits, including the following.
Teach the Basics of Investing
First, investment accounts for kids will teach your children the basics of investing. They can continue to apply these lessons throughout their lifetime.
Financial literacy advocate Mac Gardner has a simple test. He shows elementary school students a $100 bill and asks them how they might use it. Nine out of ten students would spend it immediately. Americans “are programmed to consume at an early age,” Gardner observes.
A brokerage account will help you confront this consumer impulse and teach kids the importance of saving and investing.
Get a Head Start on the Future
Second, a brokerage account will also give your children a head start on their future investing. That’s good news because according to the latest data, young people aren’t investing. Nearly three-quarters (70%) of young adults have no money invested in the stock market. Opening an investment account for your children will give your kids plenty of time for their investments to grow.
Save for Future Needs
Kids have a long way to go before retirement. But they may have other major expenses, such as college tuition, that a brokerage account can help pay for. Opening an investment account can give your kids access to the financing they’ll need for their future, and it can also provide a way for kids to contribute to these expenses.
Types of Investment Accounts for Kids
There are several different types of investment accounts for kids. Here are some of the most common.
Custodial Brokerage Accounts
The Uniform Gift to Minors Act or Uniform Transfer to Minors Act (UGMA/UTMA) allows parents to open custodial accounts in their children’s names. The account will be in your name, but your son or daughter will take full control on either their 18th or 21st birthday (depending on your state law).
Youth Investment Accounts
Youth investment accounts (such as the Fidelity Youth account) are aimed at teens between the ages of 13 and 17. These accounts are distinct from custodial accounts since the child will operate the account, but parents can monitor activity and receive alerts. The exact terms and conditions vary depending on the broker that offers these accounts.
Custodial IRA
If your child has income from a part-time job, you can open a custodial IRA. For kids, a Roth IRA can be ideal since the contributions will grow tax-free. But make sure you choose an account that allows you to pull out your investment at any time so you can use the distribution for things like college education or the purchase of a first home.
529 Account
A 529 savings account is an account that can be used for education expenses. Investments grow tax-free and can later be used for tuition, room and board, and textbooks.
Attainable Savings Plan (ABLE) Account
An attainable savings plan account is a specialized type of 529 account that allows a disabled person to save money without losing public benefits. Anyone can contribute, and the money grows tax-free. The account remains in the disabled person’s name and can be used for a variety of qualified expenses.
How to Open a Brokerage Account for Your Child
Given these options, which type of brokerage account is right for your child? Here are some tips for opening a brokerage account for kids.
Set a Shared Goal
First, talk to your child to set a clear goal that you can both agree to. For instance, if your main goal is to teach the basics of investing, a custodial account or youth account may be a solid option. But if you want to save for college, a 529 account or custodial IRA make good choices.
The point is to select an account type that aligns with your financial goals and your child’s needs.
Choose the Right Broker
Once you have a clearer understanding of what type of account you need, choose a broker that offers this option. Always compare at least three brokers to find the best deal. Compare things like brokerage fees, transaction fees, commissions, and any other fees that can take a bite out of your child’s earnings.
Open the Brokerage Account
In many cases, you’ll be able to open up a brokerage account for kids online. The whole process only takes around 15 minutes, provided you have the necessary information on hand.
You’ll need the contact information for you and your child, as well as birthdays and Social Security numbers for both you and your child. Some brokers will also require your employment information, and you can also link your brokerage account to your bank to more easily transfer money.
Help Your Child Select the Best Stocks
Here comes the fun part. Help your child select the best stocks to add to their portfolio. Keep your investments relatively small at this stage. Your main goal should be to teach them how to think critically about each investment and to make decisions based on research rather than on which companies seem popular.
Depending on your brokerage platform, you might even allow your child to make paper trades to get used to the process of selecting stocks and monitoring their performance.
Pursue Diversification Through Index Funds
Don’t sink all of your money or your child’s money into individual investments. Consider an index fund, which will immediately give your children access to a basket of stocks. Funds provide built-in diversification, which protects against market fluctuations. And an index fund is designed to mirror the performance of the underlying index (such as the S&P 500 or Nasdaq composite), which typically offers slow but reliable growth.
Monitor the Brokerage Account Together
Investment accounts for kids make excellent parenting opportunities. Set a regular time (say, once a week or month) when you and your child review the performance of the account. This will help them understand how the investing process works and give you an opportunity to review and make adjustments accordingly.
Teach the Dangers of Trading
Stock market investing is like fire: you don’t have to fear it, but it can be devastating if it’s not properly respected. Online brokerage platforms have been haunted by stories like that of Alex Kearns, a 20-year-old who took his own life after racking up high investment debt. Teaching kids to invest responsibly can prevent the kind of behavior that leads to such devastating losses.
Where to Start Researching
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