5 Best Investment Accounts For Kids

Opening investment accounts for a child is a way for parents to save for their children's future and teach them about money management. These accounts allow parents (and eventually the children) to earn extra income by investing in different financial assets like stocks and bonds.

While children's investment accounts often offer tax benefits and other advantages, choosing the best account for your situation can be a complicated task. To help you determine which investment account is best for your situation, we've compiled a list of the best investment accounts for kids.

Our Top Picks for the Best Investment Accounts For Kids

• Custodial Roth IRA: Best Account Without an Age Limit
• 529 College Saving Plans: Best for College Funds
• UTMA/UGMA Accounts: Best for Flexibility
• Coverdell Education Savings Accounts: Best for Parents of Disabled Children
• Certificates of Deposit: Safest Investment Option

Best Investment Accounts For Kids Reviews

Best Account Without an Age Limit: Custodial Roth IRA

Highlights

Roth IRAs are individual retirement accounts you contribute to with after-tax dollars. A custodial Roth IRA is a retirement account held by a minor but managed by an adult, typically a parent or guardian. The primary benefit of a custodial Roth IRA is that it doesn't have an age limit for the child as long as there's an adult to manage the account.

The caveat is that the child must earn qualified income, which the IRS defines as taxable income or wages earned from self-employment gigs like house-sitting or tutoring. Also, contributions to your child's custodial Roth IRA are limited to $6,500 per year or to the income the child earns, whichever is lower.

There are no minimum deposit requirements to open a custodial Roth IRA account, and, unlike with traditional IRAs, the account holder can withdraw their contributions penalty-free at any time. However, to withdraw both contributions and earnings without having to pay penalties or taxes, the account holder must have had the account for at least five years (this is called the five-year rule) and wait until the age of 59 ½. And while they can withdraw up to $10,000 in earnings before retirement age for qualifying expenses like purchasing a house, the five-year rule still applies.

Best for College Funds: 529 College Saving Plans

Highlights

Saving for college is difficult, which is why many parents invest in their kids' education decades before those children even go to school. 529 college savings plans provide kids and parents a way to safely set aside some cash for their college education. Funds saved in 529 accounts can be used for various levels of higher education, like a two-year degree, a graduate degree or something in between.

There are two types of 529 college savings plans: educational savings plans and prepaid tuition plans. The former allows for tax-free withdrawals of the accumulated funds, provided the money is used for school-related expenses. Prepaid tuition plans, on the other hand, allow account holders to pay for school tuition ahead of time, helping them void the burden of student debt.

529 account beneficiaries generally enjoy tax-free withdrawals. These accounts are also easy to open and maintain, provided the funds are used for qualified expenses. Other specific tax implications of 529 plans vary state by state, but they generally range from tax deferral to income tax deductions or tax credits for contributions to a 529 account.

Best for Flexibility: UTMA/UGMA Accounts

Highlights

Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts are custodial trust accounts that enable a parent or adult to make contributions to a fund on behalf of a child. When the child reaches the legally appointed age (anywhere from 18 to 25, depending on the state), they'll assume control over the account. The primary difference between UTMA and UGMA accounts is the type of assets that can be contributed: UTMA accounts allow for almost any type of asset, while UGMA accounts are limited to insurance policies, securities and cash. Contributions to either type of account are considered irrevocable gifts to the beneficiary.

Money put into a custodial account belongs to the child and may only be used for their benefit. Upon reaching the age of majority, the child may use the funds in the account for any purpose, not just educational expenses. Custodial accounts are also subject to gift taxes. If the parent deposits more than the annual gift tax exclusion ($17,000 in 2023), they'll need to file a gift tax return. Additionally, the funds in the account technically belong to the child, so parents lose all control of funds once the child turns legal age.

One potential drawback of UTMA and UGMA accounts is that they could affect the child's eligibility for financial aid. This is because the assets held in the account belong to the child and, according to the Financial Industry Regulatory Authority (FINRA), colleges generally expect students to use up to 20% of their assets to pay for educational expenses. And while it's possible to transfer funds from a UTMA or UGMA custodial account to a 529 plan, the latter must also be set up as a custodial account for the same beneficiary. You will also have to liquidate any investments in the UTMA or UGMA account and pay taxes on gains.

Best for Parents of Disabled Children: Coverdell Education Savings Accounts

Highlights

Coverdell education savings accounts (ESAs) are another option for parents wanting to save for their children’s education. These may be used to cover elementary and secondary school expenses, not just college costs. The beneficiary of the ESA must be under 18 years of age when the account is opened, and they must withdraw all funds by age 30. These provisions don't apply to special needs beneficiaries, which makes Coverdell ESAs a great option for parents or guardians of dependents with disabilities.

Unlike 529 plans, Coverdell ESA allows you to choose the mutual funds and exchange-traded funds (ETFs) you want to invest in. And distributions from the account are tax free, provided they go toward the beneficiary’s qualified education expenses. Distributions that exceed the child's qualified education expenses are taxable, according to the IRA.

Lastly, while 529 plans have no income limitations, Cordell ESAs are only available to individuals with an adjusted gross income of less than $110,000 (or $220,000 if filing jointly). Additionally, ESAs allow a maximum contribution of $2,000 per year, while 529 plans have much higher contribution limits, depending on the plan.

Safest Investment Option: Certificates of Deposit

Highlights

Certificates of deposit (CDs) are an alternative to savings accounts, and require the account holder to leave the funds in the account for an agreed-upon term, which can range from a few months to several years. In exchange for leaving the money in the account until a set maturity date, the bank, credit union or brokerage pays the account holder a fixed interest rate for the duration of the term.

CDs are a safe investment for kids because they're insured by the Federal Deposit Insurance Corporation (FDIC), so they're extremely low risk. CDs also offer better interest rates than savings accounts and money market accounts and have a fixed rate of return, which means they can provide a stable source of income for children.

To invest in a CD on behalf of a dependent, parents and guardians must open a custodial account, such as a UGMA or UTMA account. This means the same rules apply: You cannot change the beneficiary of the account once you’ve opened it, earnings from $1,250 - $2,500 will be taxed at the child’s rate, and earnings above $2,500 will be taxed at the parent’s rate.

The biggest drawback of CDs is that funds are locked up until they mature and you have to pay hefty early withdrawal fees if you need the money sooner. And since CDs pay a fixed rate of return, you also miss out on potentially higher returns from investing your money in the stock market or elsewhere.

Other investment accounts we considered

Joint brokerage account

Highlights

As the name implies, jointly owned brokerage accounts enable parents to share one account with another person, like their child. They’re a good way to jumpstart your kid's financial journey, mainly because owner rights are shared evenly between you and your kid. However, for that same reason, parents who choose a jointly owned brokerage account give their children the same level of control over the funds, which may not be the best move. This is why jointly owned brokerage accounts are commonly used by spouses.

Investment Accounts For Kids Guide

Opening an investment account for a child can be a great way to teach them about financial responsibility while helping them save for the future. However, there are some important considerations to keep in mind when opening one of these accounts on behalf of a minor.

This guide will cover various factors to consider when opening an investment account for a child, such as the types of accounts available and the benefits and risks of investing.

What to know before choosing an investment account for kids

While there are some similarities between investment accounts used by adults and those that can be used for children, there are notable differences to consider when choosing which investment account is ideal for your kid.

Investment accounts can help your kid earn interest

Unlike saving, investing entitles your child to grow the money they deposit into a specific investment, something they don’t get by keeping their money in a piggy bank. If your child starts investing at an early age and reinvests the earned interest, they’ll begin to recognize the power of compound interest, which can help them build a substantial nest long before they retire.

Have clear financial goals before opening an investment account for your kid

There are many types of investment accounts you can open for your kid, but not all of them are a good fit. This is why it's important to identify the reason you’re opening an account in the first place. Do you want to financially prepare for your kid's college education? Or will it be a fund dedicated to their eventual retirement? Depending on your plan for your kid's future, you'll want to choose an investment account that helps you and your child achieve those goals.

Teach your child the basics of investing before opening an account on their behalf

Teach your kid the basics of saving and investing before opening an account for them. Show your child how to save by encouraging them to always set aside a few dollars for future expenses and purchases. You can also teach them the basics of investing by including them in financial conversations and showing them how their savings relate to the interest they earn.

Understand the rules and regulations that govern custodial and savings accounts

Before opening a custodial brokerage account or other type of savings account for your child, understand the rules that govern these accounts, particularly how gains are taxed, when distributions can be taken and how assets can impact your child’s eligibility for financial aid in the future.

If you’re torn between a custodial brokerage account, a college savings plan or a different option, consult a financial advisor. They can review your financial situation, objectives and timeline, and help you determine which option can best benefit your child. Even if you're already investing on behalf of a minor, a financial advisor can tell you how to get the most out of those investments.

How do investment accounts for kids work?

Investment accounts for kids work in much the same way as adult accounts. The main difference is that parents or guardians open the account on behalf of the child and act as custodians of it until the child becomes an adult and can manage their investments on their own.

Generally, the custodian is allowed to make contributions to the account and that money can then be invested in mutual funds, stocks, bonds and other securities. These accounts may also have tax benefits.

Carefully research the benefits and drawbacks of each type of account before making your decision.

What are the benefits of opening an investment account for kids?

There are several benefits of opening an investment account for your kid. Investing allows children to grow their savings over time, which they can use for different purposes when they enter adulthood, from paying for college to buying a first home.

You can also use investment accounts to teach children about the stock market and financial principles like compound interest. If financial literacy isn’t something your child will likely learn at school, then opening an investment account for them at a young age and teaching them how to manage it can give them the knowledge they’ll need to make smarter financial decisions later in life.

When is the right time to open an investment account for kids?

Generally speaking, it’s better to start investing sooner rather than later, but there’s more to it than that when it comes to investment accounts for children. Adults who want to start investing on behalf of a minor must do so through a custodial account. And if one of the purposes of the account is to teach the child about investing and money management, the right time to open one is when they’re ready to assume the responsibilities that come with investing. But ultimately, it’s up to you as a parent to decide when the time is right.

How We Found The Best Investment Accounts For Kids

Here are the factors we considered when reviewing the best investment accounts for kids.

• Contribution limits: The contribution limit is the maximum amount an account holder or custodian can contribute to an investment account. Some accounts have annual caps you can't surpass, limiting the total amount your child will be able to save.

• Tax implications: There are several different types of investment accounts, each with their own tax implications. Some accounts offer tax-free investment growth while others are tax-deferred. When it comes to investment accounts for children, there's also the issue of who pays taxes on the income the account generates, the custodian or the child. This can have a significant impact on the tax you owe at the end of the year, especially as account balances grow.

• Eligibility: As with most financial products, investment accounts for kids have age and legal requirements that may vary by state.

• Withdrawals: If you're concerned about how your child will use the funds in their investment account, choosing an account type with withdrawal controls could help you limit how much and how quickly your child can withdraw from their account.

Summary of the Best Investment Accounts For Kids

• Custodial Roth IRA: Best Account Without an Age Limit
• 529 College Saving Plans: Best for College Funds
• UTMA/UGMA Accounts: Best for Flexibility
• Coverdell Education Savings Accounts: Best for Parents of Disabled Children
• Certificates of Deposit: Safest Investment Option