From college savings plans to Roth IRAs, there are many kids’ investment accounts to choose from so that their portfolios are well underway by the time they reach adulthood.
While investment accounts for kids don’t have strict age requirements, kids can’t open an account directly. Instead, adults aged 18 and over can become custodians and open a brokerage investment account on behalf of the child. This gives parents or guardians full control and responsibility over their child’s account until they reach the age of maturity, at which point the child gains access to their funds.
These are the most popular types of child investment accounts, each with its own tax benefits, limitations and intents.
| Account type | How it works |
|---|---|
| 529 savings plans | No income or age restrictions, and it’s best suited for saving for your child’s education tax-free. |
| Teen brokerage accounts | A teen-owned brokerage account where teens get to choose their investments, with parental supervision. |
| UGMA/UTMA accounts | Carrying no contribution limits or spending restrictions, these are custodial investment accounts where you invest on the child’s behalf, and the child gains access to the funds once they reach the age of majority, which depends on the state. |
| Coverdell Education Savings accounts | Allows you to save up to $2,000 a year toward your child’s education tax-free. |
| Crypto investment accounts | Parents can open a custodial crypto wallet for their child and act as a custodian, and invest in cryptocurrencies on the child’s behalf. This method is currently more volatile than other methods. |
| Custodial IRAs | Parents can invest in typical investing options like stocks, exchange-traded funds (ETFs) and mutual funds on behalf of the child, and investments sit in a tax-advantaged account. |
| Debit cards for kids with investment features | Accounts that teach kids how to invest and manage their money with parental supervision. |
There are multiple ways to start saving for your kid’s future — and some accounts offer more of a hands-on approach to get your kid more familiar with investing.
A 529 Plan allows you to invest your after-tax dollars into your child’s future college tuition and associated fees and is typically offered by the state government. There are no income or child age restrictions, and the annual contribution limit is up to $300,000, but it varies by state. Funds saved aren’t allowed to be used for education expenses outside of tuition and fees.
There are two plans to choose from:
You may also bypass federal income taxes on the money you withdraw if you use one of these accounts for your kids’ college education. It might also qualify you for state tax deductions on your contributions.
A 529 savings account is typically not considered income when applying for financial aid with Free Application for Federal Student Aid (FAFSA) — meaning the account likely won’t impact your child’s financial aid application.
While there are few teen-owned brokerage options available, one account that empowers teens to take control of their investments and learn the basics is the Fidelity Youth Account. It’s teen-owned, there are no monthly fees, it comes with a prepaid debit card and teens can invest in stocks, exchange-traded funds (ETFs) and mutual funds with as little as $1.
Parents can view all investment activity, but they can’t approve or prevent transactions that their teen makes. Plus, the account is only available if parents also sign up for a Fidelity account.
The Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) allow you to create a custodial brokerage account for your child, which is transferred over to the child once they reach the age of majority — 18 to 25 years old depending on the state, according to Fidelity. Once they’re old enough to gain access to the account, you won’t have control over how they use the money.
UGMA and UTMA accounts don’t have contribution limits, and deposits made are considered after-tax contributions, so contributors can’t get a tax deduction. Donations to these accounts are also irreversible.
While UGMA and UTMA accounts work similarly, there are some differences:
If you’re looking for a UTMA or UGMA account with robust types of investments, Interactive Brokers offers both US-based and international stocks.
There are more platforms that help you manage custodial accounts for your kids. For example, Stash and M1 Finance offer custodial accounts with personalized portfolio recommendations. You pay a fee to use either account, but the cost is potentially offset by investment gains.
UTMA/UGMA accounts can impact financial aid eligibility
UGMA and UTMA accounts can disqualify your child from getting financial aid in the future. Since the account is in your child's name and UTMA/UGMA accounts are considered income, it might reduce your child's need-based financial aid eligibility.
— Bethany Hickey, Writer, Banking and Loans.
Similar to a 529 savings plan, a Coverdell Education Savings account lets you invest for your child’s elementary, high school or college education.
A Coverdell account gives you more options in the types of investments you can make compared to a 529 savings plan. You can invest your money in a number of securities with tax-free earnings growth and withdrawals when the funds are spent on eligible expenses, such as tuition.
However, you can only contribute up to $2,000 per year — a lower amount than investing in a 529 savings plan, which is usually around $300,000 annually. Coverdell Education Savings also carry income requirements — your modified adjusted gross income can’t be more than $110,000 per year if you’re a single filer or $220,000 if you’re filing jointly.
A little on the non-traditional side, you can open a cryptocurrency investment account as a custodian for your child via a crypto wallet. From there, you can buy different cryptocurrencies and track their fluctuations in the market. However, crypto is generally considered more of a riskier investment strategy than other tactics we’ve listed, because it’s a new type of security and it fluctuates.
Crypto investments are also available through EarlyBird, which lets you and your kids invest in Bitcoin (BTC) and Ethereum (ETH) and offers portfolios that you don’t have to build yourself. There’s also Stockpile, which lets kids invest in crypto, stocks and ETFs with as little as $1.
For tax concerns, know that the IRS treats crypto investments as an asset, so they’re subject to short- or long-term capital gains taxes. Also, anytime you sell or exchange cryptocurrency, it’s considered a taxable event.
Custodial IRAs are tax-advantaged retirement accounts available to minors with earned income. The annual contribution limit is $6,500 or the total earned income your child made that year — whichever is less. Most assets are allowed in an IRA, including stocks, bonds, ETFs and mutual funds. And, like other custodial accounts, you manage the account and assets until your child reaches the age of majority.
There are two main IRA options for children:
If your goal is to teach your kid money management skills, such as how to invest, save and budget, look at debit cards for kids. These banking products put kids in the driver’s seat while letting guardians approve their investment choices.
A few examples of kids’ cards that offer these features include BusyKid and Greenlight — both offer chore and allowance features and the ability to invest in over 4,000 stock and ETF options with parental approval and no trading fees.
You must be at least 18 years old to set up a brokerage account for your kid. Opening an account means you’re acting as a custodian on the account until the child reaches the age of maturity — often 18 to 25 years old, depending on the state.
You’ll need this information handy to open an account:
There are other savings options to consider if you want to diversify you kid’s investments:
When you invest for your kids early, you give them a major head start in the race for financial freedom. The power of compound interest is on their side, because they have more time to grow their investments.
Imagine that you invest $50 a month in a custodial account. In 15 years, you’d have contributed $9,050, but your child would have about $14,700 — based on a 6% annual growth rate with interest compounded monthly. If they continue investing $50 a month as an adult, they’d have over $50,500.
Also, depending on the account, investing early gives you the opportunity to teach your kids how investing works and involve them in the decision-making process by letting them choose which investments they’d like to make.
Most parents (68%) say that they give their children an allowance but none said that their kids were using that money for investments. Just shy of half (42%) say that their kids just keeps the money in an account.
Does paying for my child’s tuition fall under the gift tax?
If you give your child a large sum of money and your child isn’t obligated to repay you, it counts as a gift and may be subject to the gift tax. Gift tax rates range from 18% to 40%.
However, tuition or medical expenses you pay for someone or gifts that are not more than the annual exclusion for the calendar year (up to $16,000 in 2022) are excluded from the gift tax. Be sure to consult with a tax professional for more information on your specific situation.
What about the Kiddie Tax?
If your child’s interest, dividends and other unearned income is more than $2,300 per year, it may be subject to the Kiddie Tax, according to the IRS. If your child has no earned income, unearned income up to $1,250 is not taxed as of 2023. However, the next $1,250 is taxed at the child’s rate, and any amount over $2,300 is taxed at the parent’s tax rate. For more information, visit IRS.gov.
Are UGMA/UTMA accounts taxed?
UGMA and UTMA accounts are not tax-sheltered. Reporting requirements for taxes depend on the income of the beneficiary and the beneficiary’s age. Because the account is in the child’s name, earnings are typically taxed at the child’s tax rate.
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