Investing for Kids

You likely have lots of hopes and dreams for your children’s futures. And along with those aspirations comes the question of how you’ll pay for them. That’s where investing for kids comes in. Investing early can help build your child’s wealth, leveraging time to work towards long-term financial goals.

And it’s never too early to start, because the longer your money is invested, the more time it has for potential growth.

Another perk of investing for kids: it’s a chance to teach them financial literacy. Your kids have the chance to develop their personal finance savvy so that they’re prepared with good money management skills when it’s time to reap the rewards of investing and launch their adult lives.  

In most cases, kids can’t invest for themselves directly. But parents, guardians, and any other adult caring for a child can make investments for them through vehicles like custodial accounts, brokerage accounts, education accounts, and even retirement accounts. 

In this article, we’ll discuss:

• Reasons to invest for kids
• Considerations when investing for kids
• Investment accounts for kids
• FAQs about investing for kids

Reasons to invest for kids

While saving money in a bank account can help you fund short-term needs, investing can provide long-term growth opportunities, potentially beyond what traditional savings can offer. Whether you’re investing to build a college fund for your kids, help them move into their first apartment, or generally set them up for a financially secure future, here are some common reasons people invest for kids:

• Compounding returns: Compounding returns over time means you can make money on your initial investments plus your past earnings, primarily by reinvesting your dividends. If you start investing when a child is born, you could get 18 years of compound returns before college comes around. 
• Reduce future student loans: The cost of higher education can be significant, often leaving new graduates with significant debt. Investing for a kid’s education can be an effective way to offset some of the future costs of college and reduce the amount of financial aid they’ll need.  
• Take advantage of tax benefits: Many investment accounts for children come with tax benefits which can help maximize the returns on your investments (consult a tax advisor for specific benefits).
• Give them a financial head start: The money you invest for kids can help them avoid future debt and get a head start on saving for their own adult milestones, like buying a house or having children of their own.  
• Teach them financial literacy: Habit building starts early. If you show your children how to manage and invest their money, they’ll be more confident in the future and less likely to make costly mistakes.

Considerations when investing for kids

First, consider the timeline for your financial goals. Because money invested in the stock market always comes with some level of risk, investing is typically a long-term strategy. Unlike savings in a bank account, your investments aren’t FDIC-insured and are always subject to some risk, so you could lose money. That’s why investing is generally better suited to long-term goals; you have time to recover from any losses or market downturns. 

Next, be sure your personal finances are in shape. Many of the accounts designed to invest for kids come with strict rules about when and how you can withdraw money. So you’ll want to ensure your household expenses are covered and you have enough put aside for short-term needs.  

• Pay off high-interest credit card debt and personal loans
• Maintain a budget that includes funds for saving and investing
• Build an emergency fund that can cover unexpected expenses
• Store short-term savings in a high-yield savings account or money market account to earn compound interest
• Contribute sufficient money to your own retirement fund 

Investment accounts for kids

There are multiple types of investment accounts designed specifically with investing for kids in mind. The best investment accounts for your unique needs will depend on a few of key factors: your time horizon, your current financial situation, and what you want to use the money for. Each account comes with different advantages, limitations, and use cases. 

Custodial accounts 

Custodial accounts allow adults to open an investment account on behalf of a child. While they’re typically opened by a parent or guardian, any adult can open one for a minor beneficiary. There are two primary kinds of custodial accounts: UGMA (Uniform Gift to Minors Act) accounts and UTMA (Uniform Transfer to Minors Act) accounts. The difference between them is the type of investments allowed; UGMA accounts can only hold financial products, while you can include a wider variety of assets in a UTMA account, such as real estate or collectibles.

These custodial brokerage accounts work much like any other type of brokerage account, allowing you to invest in individual stocks, bonds, mutual funds, index funds, exchange-traded funds (ETFs), and other securities. Returns are subject to capital gains tax or income tax, depending on the type of earnings. And while you can contribute as much as you like to a custodial account, you might trigger a gift tax if you invest more than $17,000 (as a single filer) or $34,000 (as a married couple filing jointly) annually.

Though the custodian of the account contributes money and gets to make the investment choices, all contributions and earnings are considered a gift to the beneficiary. While the child is a minor, you can only withdraw funds to use directly for their benefit. Otherwise, the money must remain in the account until the beneficiary reaches adulthood, which is between age 18 and 25 depending on your state. At that point, the beneficiary takes control of the custodial account and can use the funds however they choose. 

Invest in a child’s future.

Give them a head start with a custodial account.

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Custodial Roth IRAs

Roth IRAs are tax-advantaged retirement accounts. And while you might not immediately think of retirement when investing for kids, starting a nest egg for their golden years when they’re young can give them a leg up on long-term financial security. Custodial IRAs can also be useful opportunities to teach kids about investing. While the adult who opens the account is the one managing it, you could involve your kid when making investment choices to advance their financial education. 

If your child has taxable earned income, you can open a custodial Roth IRA for them. Their income doesn’t need to come from formal employment with a traditional business; the work they do babysitting or mowing lawns can be considered self-employment so the money kids earn from this can also be contributed as long as it’s reported to the IRS.

A custodial IRA has tax benefits and requirements similar to a typical Roth IRA: contributions are made with after-tax money, but qualified withdrawals are tax-free. Initial contribution amounts can be withdrawn at any time, and the investment growth can be used for retirement as of age 59½ or sooner for special circumstances like qualified education expenses or a first-time home purchase. 

The limit for custodial Roth IRA contributions is $7,000 (as of 2024) or however much the child made in that calendar year, whichever is lower. Those contributions can come from the child’s income or as a gift from you as long as they don’t exceed the total limit.  

Your estate’s Roth IRA 

If you’re investing for kids’ security after your death, you can invest in a Roth IRA for yourself with the intention of passing it down to them. The upside of this strategy is that your kids can inherit the money and also enjoy the tax benefits that come with a Roth IRA. Once the beneficiary inherits the IRA, they can withdraw the money immediately without penalties or taxes. However, they can’t make additional contributions, and they must liquidate the account by the end of the tenth year post-inheritance.

529 plans

A 529 plan is an investment account specifically designed to pay for a child’s education costs. If your financial goals for your children include reducing future student loans and encouraging education, this could be an effective investment vehicle for you. There are two primary kinds of 529 plans.

• 529 education savings account: A 529 plan differs from a custodial account because the invested money can only be used for qualified college, K-12 education, and some apprenticeship programs. Your investments grow tax-free, qualified withdrawals are tax-free, and contributions are often tax-deductible. 
• 529 prepaid tuition plan. This account allows you to purchase college credits at the current tuition rates for qualified in-state public institutions, and then use them when your child goes to college. Prepaid plans can be a good choice if you expect tuition costs to continue to increase, but they’re only available in limited states at some public colleges.

Coverdell ESAs

A Coverdell Education Savings Account (ESA) is another form of education-specific investment or savings account. The funds can be used for qualified K-12 and college expenses, but the account must be opened before the child turns 18. Contributions grow tax-free, and qualified withdrawals for education expenses are also tax-free. 

Unlike a 529 or custodial account, Coverdell ESAs have strict contribution limits and requirements. Only households that earn under $110,000 (as a single filer) or $220,000 (married filing jointly) annually can use an ESA. The annual contribution limit is $2,000, and may be reduced based on your household’s annual income. 

ABLE accounts

An ABLE account, also called a 529A account, allows people with disabilities to save and invest without risking loss of their public benefits. While this type of account isn’t strictly designed for investing for kids, it can be a helpful option for parents of minors with disabilities. Like a custodial account, the beneficiary owns the account, but anyone can contribute. Contributions grow tax-free and can be withdrawn for qualified expenses such as housing, education, or transportation. 

Because ABLE accounts have strict rules, you may wish to discuss this option with a financial advisor to see if it makes sense for you. 

Investing in your kids’ future

As you explore your options for investing for kids, you’ll likely want to build your own financial knowledge as well as educate your kids. These resources can walk you through key concepts to empower both you and the children in your life:  

• The 5 principles of financial literacy
• How to start investing
• How an investment portfolio works
• How to set financial goals
• How to help your teenagers start investing

Ready to get started? Learn about Stash’s custodial account (Kids Portfolio), which you can open with as little as $5. Remember, the sooner you start, the more time and opportunities your money has to grow. 

Invest in a child’s future.

Give them a head start with a custodial account.

Learn more

FAQs about investing for kids

How can you build your child’s wealth?

Building wealth starts early. Investing and saving for your child’s future can help them start on the right foot. Those extra years of compound interest and returns will help them sidestep future debt and avoid needing personal loans. Then, teaching your kids financial literacy and personal finance skills will help them manage their money in adulthood. So you can set them up to start a couple of steps ahead with the right money management skills to continue their healthy money habits. 

How old do kids have to be to invest for themselves?

In most cases, people must be 18 years old to open and manage an investment account independently. That said, you can open a custodial investment account when they’re young and involve them in their finances so they start building those smart money skills. Once kids start making money of their own, you can open a custodial Roth IRA and help them invest the money they make. In addition to investing options, many banks offer savings accounts designed for children. If your 10-year-old sets up a lemonade stand or your 12-year-old mows neighborhood lawns, a bank account can be a good way for them to learn good saving habits and benefit from compound interest. 

How to get started: how should you invest $1,000 for your child?

There’s no universal answer. The best investments for your child will depend on their age, your investment goals, time horizon, risk tolerance, income, lifestyle, how you plan to use the money, and many other factors. You’ll also want to consider what you want to invest in: stocks, real estate, bonds, or other investment vehicles. Deciding on those details will help you find the best investment account for your unique financial goals and situation. 

When can children access what I invest for them?

When and how the money you’re investing for kids can be accessed will depend on your account type and state. Most accounts allow the beneficiary to access funds in a custodial account between 18 and 25 years old; education accounts can be accessed earlier for qualified expenses; the money in custodial Roth IRAs usually can’t be withdrawn until age 59½. 

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