Parents who dream of starting an investment account for their kids may find the search overwhelming. Unless you’re already an experienced investor, the terminology, tax impacts, and account rules can get pretty confusing.
Good news! You don’t have to be a tax expert or financial planner to find the best investing accounts for kids. To simplify your research, we’ve put together a list of five of the most recommended investment account types including their benefits, limitations, and what it takes to get started.
Table of Contents
5 Best Investment Accounts for Kids In 2024
1. Certificates Of Deposit
Banks and credit unions offer Certificates of Deposit (CDs) that allow you to set aside a fixed amount of money for a fixed amount of time. Usually the longer the time frame, the higher the interest rate.
Pros
CDs generally pay higher interest rates than savings accounts. They are FDIC insured up to $250,000 and require little management on your part once the account is opened. Fixed rate CDs lock in your interest rate for the length of the term, which insulates your investment even when market rates drop.
Cons
CDs “tie up” your money for a certain period of time, which can be a drawback. You can withdraw the money before the end of the term, but it will most likely cause you (and your child) to lose the interest you earned and incur penalties. When you put your money in low-risk investments like CDs, you potentially miss out on earning the higher interest typical of accounts tied to the stock market.
How to get started
To open a CD on behalf of your child, a parent or guardian will need to set up a custodial account with your child as beneficiary. You can do this through almost any bank or credit union online or in person. You’ll need to supply your name, address, date of birth, and social security number for you and your child, as well as identification like a driver’s license or birth certificate.
Highlights & Features
CDs come with different terms (time frames) such as six months, one year, two years, and more, so you can choose the amount of time that meets your needs. The longer the term, the longer you’ll need to leave that money alone and let it build interest for your child, but the longer the interest rate is fixed.
To reduce the risk that comes from your child’s money being unavailable, you can split funds across CDs of different lengths of time — $2,000 in a 1-year CD and $2,000 in a 2 year CD, for example — and so on. Investors call this “laddering.”
2. Custodial Roth IRA
When you see the word “Roth” in front of “IRA,” it’s an individual retirement account with some pretty cool tax advantages. Most people think about IRAs for retirement savings only, but custodial Roth IRAs make one of the best investment accounts for kids too. You make regular contributions using after-tax dollars and earn interest along the way.
Pros
The earnings grow tax-free and distributions at retirement are tax-free — both great features. But wait, we’re talking about accounts for kids, so why bring up retirement? Because the earlier your child starts preparing the better, capitalizing on many years of compound interest. Your contributions earn money through investments like stocks which typically yield higher interest rates than CDs.
Cons
To qualify, your child must be earning taxable income. So this account only works if your kid has a part-time job. A maximum contribution amount applies: either $6,500 per year or your kid’s earned income, whichever is lower. Prematurely withdrawing the earnings leads to penalties and possible tax consequences.
How to get started
The account doesn’t require a minimum amount to open, making it easy to get started. Parents and guardians set up a custodial Roth IRA and manage the account on their child’s behalf until they are 18 or 21, depending on the state. Set up is simple and can be done online or in person through a bank or broker.
Highlights & Features
Unlike a CD, the deposits you put into a Roth IRA, which are called contributions, can be withdrawn at any time without penalty, and earnings aren’t limited to a certain expense category like education. Your child could use the fund for retirement but also for certain qualifying expenses well before that, like buying a home or car if the account has been open for at least five years.
3. 529 College Savings Plan
To avoid or reduce the need for student loans, consider the 529 College Savings Plan. It’s an investment account designed specifically to help fund education.
Pros
Despite the name, you can use this account to save for more than a four-year college degree. You can withdraw up to $10,000 per year for K-12 private school expenses. Your child can also pay for two-year degrees, apprenticeships, and graduate school with this account. Another benefit, as the custodian you maintain ownership and control of the account even if your child is 18 or older.
Cons
The account earns money tax-free each year, and withdrawals don’t get taxed either, as long as they’re being used for education. But this also means the account is limited in purpose; unlike the Custodial Roth IRA, for example, you will incur penalties and possibly tax assessments if you withdraw the money out for anything other than education.
How to get started
Banks and investment brokers offer this account online or in person. As the custodian of this plan, you manage the account and designate your child as the beneficiary, so you’ll need name, date of birth, address, social security number, and proof of identity for both of you.
Highlights/Features
The earlier you start this kind of investment account for kids, the more time your child has to benefit from compound interest and tax-free growth. Although the funds must be used for school, items like books, fees, room and board, and computers meet the definition of “qualified education expenses,” so it helps with more than tuition. This investment account has no maximum contribution limit, but you’ll want to be aware of how the gift tax rules work.
4. Teenager Brokerage Accounts
If you love the idea of teaching kids about the stock market from a young age, you may want to check out brokerage accounts for teenagers. Your child owns the account, but you can and should help them understand how investing works.
Pros
Minimal fees, fractional shares, and diverse investment options to choose from make these accounts accessible to young people. Your teenager owns the account, but you can have fun and guide them by picking out stocks together, for example. They build a healthy foundation for future investing and enjoy having some control over their finances, too.
Cons
Brokerage accounts for teens don’t have specific tax advantages like a 529 plan or a Custodial Roth IRA. On the other hand, that means the money doesn’t have to be used for any certain purpose like education. Remember that teens own and control the account, but most companies offer the parent or guardian the ability to log in and monitor the account activity.
How to get started
Check out investment accounts that specifically offer teen or youth accounts. Your child will need to be part of the application process with you, and you’ll be asked for documents like your tax return, a copy of your teen’s social security card, and a birth certificate, driver’s license or similar proof of citizenship.
Highlights/Features
Companies like Fidelity offer accounts with no minimums to open and no fees. They also provide parents with account monitoring access via their website or app. By starting their own brokerage account as a teenager, kids get the benefit of a long-term investment strategy which often yields higher returns than fixed rate CDs or other low-risk, shorter-term investments.
5. UGMA/UTMA
Account names like Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) may not roll off the tongue, but they have plenty of benefits. Similar to the Roth IRA, these are custodial investment accounts for kids which a parent opens and the child takes over when they turn 18 to 25 (depending on the state).
The difference in these two account types depends on the source of the contribution:
- Only insurance policies, securities, and cash can fund UGMA accounts.
- Almost any asset type can fund UTMAs.
Pros
Parents and guardians can contribute money on behalf of their child, and the money must be used solely for that child’s benefit. When the kid becomes the owner at the age specified in their state, they can use the money for whatever they want. They’re not limited to educational expenses.
Cons
The flip side of the coin for the kid being able to spend the earnings however they want is that they can spend the earnings however they want! So, you’ll want to be comfortable with your child having sole control over how they use the money when they come of age. Gift tax laws apply, as well, so contributions over a certain amount will require filing a tax return.
How to get started
The custodian (parent/guardian) opens the account with the child as the beneficiary. Search online or go in person to a broker or bank. Platforms like Acorns offer UTMA/UGMA account options and are easy to navigate.
Highlights/Features
Adding money to the account is not just limited to parents. Family members can also contribute. The laws supporting UTMA and UGMA favor your child – contributions and gifts are irrevocable.
Final Word on the Best Investment Accounts for Kids
When you’re trying to choose the best investment account for your child, start by identifying your goals. If you want to help your child grow money for any purpose, you may prefer a Custodial Roth IRA or a Brokerage Account. To reduce the chance of education debt, consider the 529 College Savings Plan. For low-effort, low-risk investing, you might choose certificates of deposit. You’ll earn more interest than a traditional savings account, and you can get your kiddo excited about math when they see how compound interest works.
Choosing the right investment account for your kids requires parents to do their homework. You’ll want to carefully consider the rules and regulations, tax implications, and intended purpose of each account type. It’s always a good idea to consult a tax professional or financial planner, too.
The biggest risk is doing nothing. From newborns to high school seniors, setting up investment accounts for kids can positively impact the rest of their lives. You can teach them how to manage money and cultivate lifelong confidence in their ability to build wealth.
FAQs
It depends on the account. The 529 College Savings Plan affects financial aid the least. The value in the account is considered a parental asset which is given less weight than student assets in the financial aid formula. Brokerage accounts, Custodial IRAs, CDs and UGMA/UTMAs that have transferred to your child’s ownership do have impact because a student must report them as assets. But if your investments have performed well and were started early, you may not need as much financial aid, making the investment worth it.
CDs have long been considered a low-risk investment because they are FDIC insured (up to $250,000) and pay at fixed interest rates. That means you get your initial investment back plus the interest you earned when the CD matures. They do not offer the highest possible interest rates available in the investment world, so you may want to put some money in CDs, but other funds in something tied to the stock market for higher returns.