How To Open an Investment Account For Your Kids (+ Why You Should)

Like many parents, I started thinking about how to save for my child’s future before she was even born. While there are many options, from savings accounts to certificates of deposit (CDs), I ultimately settled on an investment account.

Opening an investment account for your kids comes with plenty of perks, including the power of compound interest and, in some cases, certain tax advantages. And with several different account types to choose from, each parent can choose one that’s best for their situation.

If you’re considering opening an investment account for your kids, learn the value of this strategy, the best account type to use, and tips to make the most of your investments.

Why it makes sense to invest for your kids

Most of us already recognize the value of investing as part of our financial strategy, especially when compared with putting money in a basic savings account or stashing it under the mattress.

Investing for your children can provide them with many of the same benefits you already enjoy — and then some. Plus, you can get started today, no matter how old your kids are.

Time is on your side

Time is the most valuable factor when saving for the future. The earlier you begin saving and investing, the bigger the impact your efforts can have.

• The longer you save, the more you can contribute. Putting $200 a month into an account for five years is great, but putting $200 a month into an account for 15 years is even better.
• Compound interest helps your money grow. With compounding, you earn interest on interest. You’ll reap more benefits by leaving your money alone to compound.
• Long-term investing provides a buffer against market changes. Peaks and slumps are unavoidable. By building your kids’ investments early, you can balance the impacts of a down market while taking advantage of upswings.

Earnings can be much higher

If you put your savings in a high-yield savings account, you can earn a decent amount of interest. As of November 2024, you can earn upwards of 5% in some accounts. However, even the best savings accounts have a lower average return than the stock market. Additionally, when interest rates fall, so does the return on interest-bearing bank accounts.

But you may see more growth if you invest instead — whether in mutual funds, exchange-traded funds (ETFs), or even individual stocks. According to the Securities and Exchange Commission (SEC), the stock market has an average annual return of around 10%. That’s double the return of a decent high-yield savings account.

Tax rates are kind to kids

Depending on how much you contribute to your child’s investment account and how much that account earns, you may find that the IRS is lenient when it comes to investing for kids.

First, custodial and teen brokerage accounts are subject to the “kiddie tax.” Under this tax law, the first $2,500 of your child’s investment income (as of 2024) is exempt from taxation, and anything beyond that is taxed at your child’s tax rate. Additionally, earnings in other tax-advantaged accounts like 529 plans and custodial Roth IRAs won’t be taxed.

It’s a great financial lesson

As parents, it’s our job to teach our kids about saving money, living within their means, and planning for the future. Letting your kids watch their investments grow over the years can be a great way to pique their interest.

You can use their portfolio to teach important lessons about budgeting, automating savings, the power of interest, and the stock market. Plus, your child may find it fun to buy shares of a company they support.

Types of investment accounts for kids

When preparing to open an investment account for your child, the right account depends on whether you’re saving for short- or long-term goals, how much you have set aside, and how you want the money to be used.

Custodial brokerage accounts

Who it’s best for: A custodial brokerage account is excellent if you want flexibility — your child can use the money for anything — but you’re comfortable with them getting complete control of it when they become an adult.

How to find one: Consider the types of investments available, the fees charged, and how easy it is for others to contribute. Some custodial account platforms only allow you to choose from certain diversified fund baskets, while others allow you to choose your investments entirely. You can open a custodial account with most major brokerage firms, such as Fidelity, Charles Schwab, and others.

A custodial brokerage account is the closest thing to a traditional investment account you can open and manage on your child’s behalf. The two types of custodial brokerage accounts are UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts, which differ slightly in the types of assets each can hold.

Your child’s portfolio can be funded with after-tax dollars from parents, grandparents, or anyone. With a custodial account, your kid is officially designated as the owner. You can manage the portfolio as you see fit until they come of age (usually 18 or 21, depending on the state). Funds can be withdrawn but must be used solely for the benefit of the minor owner.

Teen brokerage accounts

A teen brokerage account is a newer type of account on the market that has the benefits of a custodial account while also giving teens more control over their money. Teen brokerage accounts aren’t widely available with most brokers, but you can open one through Fidelity.

529 plans

Who it’s best for: A 529 plan is a good option for funds you plan to use for your child’s college education, thanks to the exceptional tax benefits. However, you’ll pay penalties if you use the money for anything else.

How to find one: While many states have 529 accounts and designated platforms, you aren’t required to use your state’s 529 plan. Make sure to compare account features, investment options, and fees.

If you’re saving and investing for educational expenses, a 529 plan may be better than a custodial brokerage account. Although the rules on 529s vary by state, they all provide a vehicle for tax-advantaged savings that can be used on K-12 or post-secondary education.

Though 529 plan contributions aren’t always tax-deductible on your federal taxes (they may be on your state taxes, depending on where you live), they have other tax perks. You won’t pay taxes on your investment earnings or on withdrawals used for qualified educational expenses. Contribution limits on 529 plans range from $235,000 to $575,000.

Custodial individual retirement accounts (IRAs)

Who it’s best for: A custodial IRA is a good option if your child has their own earned income, but you may want to pair it with another account if you hope to invest beyond annual IRA limits. Opening one is an excellent idea if you want to give your child a head start on their long-term retirement savings, especially because it offers tax-free growth.

How to find one: Many major brokerages, including Fidelity and Charles Schwab, offer custodial retirement accounts, but they aren’t as common as custodial brokerage accounts.

If your child has earned income over the year, they can contribute to a Roth IRA. A custodial IRA is held and managed by an adult on a child’s behalf, but ownership is transferred once the child reaches age 18 (or 21, in some states). In this way, it works similarly to other custodial accounts, but with more tax advantages.

Your child can contribute up to $7,000 annually to their custodial Roth IRA in 2024 and 2025. Although there are no tax deductions, there are no taxes on withdrawals, either. Account holders can access their contributions anytime with no penalties since they’ve already paid taxes, making this option more flexible than 529 plans. Additionally, you can withdraw earnings penalty-free for things like higher education, buying a home, or having or adopting a child.

Tips to invest for your child

All of the investment accounts we’ve mentioned have some major perks for both you and your kids, but there are a few things you should consider before you start investing.

1. Set specific goals

It can be helpful to have specific goals in mind when investing for your kids, including knowing what you’re investing for. Many parents want to invest to help their kids pay for college. However, you might want more flexibility, allowing your child to use the money for any purpose. Knowing exactly why you’re investing can help you choose the best account and assets.

2. Make a plan for contributions

Having a plan for contributions can ensure you meet your savings goals. For this, it helps to work backward. For example, let’s say you want to save $100,000 for your child’s college, and you have 18 years to do it. You estimate a 7% annual return.

Using a compound interest calculator, you can plug in those numbers to determine how much you should contribute each month to reach your $100,000 goal, which is about $250.

3. Know the tax implications

Like your own brokerage account, your kids’ investment accounts will have some tax implications, but they vary depending on the account.

Another tax consideration is gift taxes. If you contribute money to an investment account your child owns, you may be subject to the gift tax. In 2025, you can gift up to $19,000 per gifter, per recipient, without paying gift tax. If you’re married, you and your spouse can contribute up to $38,000 for each child. You’ll have to file a gift tax return if your contributions exceed that.

4. Consider financial aid

Different types of investment accounts have different impacts when applying for financial aid for your kids. The FAFSA (Free Application for Federal Student Aid) formula assumes that parents will use up to 5.64% of their assets to pay for college, while children will use 20%.

Therefore, assets owned by your child could reduce the amount of financial aid they’re eligible for more than your assets. If your primary concern is qualifying for aid, you may be better off investing solely in a 529 plan.

529 plans are the property of whoever opens the account, so the money is considered your assets and has a lower impact on your child’s financial aid eligibility. On the other hand, custodial accounts in your child’s name have a greater impact. However, retirement accounts, including those in your child’s name, are exempt until you withdraw the money.

How to start investing for kids

Once you know which kind of account you want to open for your child and how you’ll manage the funds, you can start investing.

1. Choose a platform

No matter what type of investment account you choose, choose a platform carefully. Some offer a full suite of investment options, while others may only have limited fund options for child accounts. Consider fees since many platforms charge them.

For example, you can choose a major broker like Fidelity or Schwab and choose all your investments while paying no account fees. However, if you aren’t comfortable doing this, you could use a platform like UNest, which provides diversified portfolios with monthly fees.

2. Sign up

These days, you can set up an account for your child online in almost all cases.

You’ll need to have your information and your child’s information handy, and you may need to provide information about your funding sources — like your bank routing and account numbers.

3. Start contributing

Setting up auto-transfers is an easy way to accumulate funds without having to think about it weekly or monthly. You can always increase or decrease contributions later as your budget allows.

You may want to give the account information to grandparents, aunts and uncles, or others interested in contributing to your child’s future, especially for birthdays and holidays.

FAQs

Bottom line

Most parents recognize the value of creating a savings account for their child, whether to build college savings or give their kids a headstart. However, you can — and should — open an investment account on your child’s behalf as well.

While all investments come with risk, an investment portfolio for your child, whether through a custodial account or 529 plan, can help you save for their future while enjoying tax advantages.

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