How to Get Your Kid Started With Investing

Author: Carrie Kirby / Source: Wise Bread

My daughter recently lost $80 in her bedroom. It’s just gone. One theory is that we accidentally donated it to Goodwill, since she had stored it in an old book and we’d been clearing out a lot of junk. But it got me thinking: What would be a better place to keep money she’s not using?

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She’s been bringing in some respectable allowance earnings with the chores she’s taken on recently. Plus, she always receives some money for birthdays, and she doesn’t spend much. Maybe an investment account?

While the investing rules are a little different for minors compared to adults, it’s not hard to get your child started investing. Even if they only make a little money, the experience may encourage them to start investing for retirement early in adulthood, which can set them up for life. Here’s how to show your kid the basics of investing.

Determine what kind of account to set up

Children can set up savings, checking, or brokerage accounts using the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). All they need is an adult (presumably you) to sign on as the account’s custodian. This means you have to approve what your child does with the money until your kid is of age, which is 18 or 21, depending on what state you live in. Because the funds or investments in a UTMA legally belong to your child, once they’re in this account, they can only be spent for your child’s benefit. You can’t deposit $100 in your child’s UTMA account and later decide you want it back or transfer it to another child.

Setting up a UTMA account is much like setting up any other account. You can walk into a bank or credit union and open one for your child by filling out some paperwork and showing your identification, or you can go online to sign up for one with a firm such as Vanguard.

Your child could also set up a UTMA 529 savings plan. The 529 is a college savings vehicle that has tax advantages, but also comes with restrictions on how it can be spent. More on that below.

Aside from a traditional brokerage account, your child could also try a micro-investing account, since they’re likely to be starting with a small amount of money. You can set up a custodial account through Stash or Stockpile — in fact, Stockpile even works with BusyKid, an app that helps families track kids’ chores and pay their allowances digitally.

Besides an investment account, you may also need to open a checking or money market UTMA for your child and link it to the brokerage account, as a way to fund the brokerage account and a place to receive dividends and other proceeds.

Unless they have earned income from working, your kids can’t set up a traditional or Roth individual retirement account. (See also: 9 Essential Personal Finance Skills to Teach Your Kid Before They Move Out)