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Protect Your Child's Future: Five Best Investment Accounts for Kids


ForumDaily New York

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Opening an investment account for your child is a good first step to learn how to handle money and save for a goal. CNBC talks about the 5 best investment accounts for kids.

It's never too early to start invest in your children and teach them how to save money for one purpose or another.

1. Brokerage account owned by a teenager

Who is this for? Brokerage companies have investment accounts exclusively for minors. This is ideal for parents who want their older children to be more active in their learning investing. Just note that a brokerage account in a minor's name is considered a student asset when it comes to eligibility for federal financial aid for college.

Benefits. Teen-owned brokerage accounts are a good way to teach kids hands-on money management while keeping track of their activities. For example, with the Fidelity Youth® Account, an investment account for teens 13 to 17 years old, the child controls the account, but parents can monitor activity, transactions and trades.

On the subject: What do the richest people in the world invest in?

There are no minimum requirements or account fees required. Teens can invest in most U.S. stocks and some ETFs and funds.

2. 529 College Savings Plan

Who is this for? This college savings plan is popular among parents who want to start investing in their children's educational future. 529 plans are government-sponsored education savings accounts into which parents, relatives or friends can make after-tax contributions. The 529 plan and withdrawals are tax-free as long as the money is used to cover qualified college expenses (tuition, room and board, books, technology equipment, etc.). You do not have to live in the state of the 529 plan you choose.

Benefits. If your child who has a 529 Plan account ultimately doesn't need the funds for college, you have the option of passing them on to another child, a grandchild, or using it for your own qualified educational needs. You can also roll over unused 529 Plan funds to the same beneficiary's Roth IRA, up to $35. Note that rules vary from state to state.

3. Coverdell ESA

Coverdell ESAs are another tax-advantaged way to invest in your child's education. Unlike a 529 Plan, there are income limits on who is eligible. The income limit for married couples filing jointly is $220 adjusted gross income (MAGI) and $000 MAGI for single filers.

Your money grows tax-free, just like withdrawals, as long as they are used to cover qualified education expenses (tuition, books, uniforms, tutoring, etc.) from kindergarten through college.

Benefits. Coverdell ESAs are different because the money can be used at almost all levels of education, starting in kindergarten. They are easily accessible as parents can open an account at a bank, credit union or brokerage firm, and the investment choices are extensive, including individual stocks, bonds, mutual funds, real estate investment trusts, ETFs, and more.

4. Custodial Roth IRA

Who is this for? A Custodial Roth IRA is a tax-advantaged retirement account that an adult (often a parent) opens and manages for their child. This investment option is for those who want to start saving for their child early. Custodial Roth IRAs require that the beneficiary of the account (i.e., your child) have income, so they are ideal for families with an older child working part-time, such as babysitting.


5. Custodial UGMA or UTMA

Who is this for? A Custodial UGMA or UTMA account is a brokerage account that adults can open on behalf of a child and manage until the child is 18 to 25 years old (depending on the state). Once the child becomes an adult, he or she takes control of the account and decides how to use the funds. The two types of custodial accounts available are covered by the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA).

These investment accounts are designed for adults who want their children to have maximum flexibility in how they use their funds. However, no account forces users to allocate funds for retirement, education, or anything else for that matter.

Contributions are tax-deductible and anyone can contribute to an escrow account.

Because the investment assets held in these accounts are in the minor's name, they appear as student assets when it comes to eligibility for federal financial aid for college.

Advantages. UGMA or UTMA accounts can be used for anything. There are no contribution or income limits, so everyone can take advantage of the benefits. While UGMA and UTMA accounts allow you to invest in cash, stocks and bonds, only UTMA accounts offer more variety with the addition of real estate assets.

Which investment account to choose for your child

The type of investment account you can open for your child ideally matches your intended goal. If you need to raise funds for your child's education, a 529 Plan or Coverdell ESA is the best option.

If you need to raise money for your child's retirement years and they are currently receiving income, then a Custodial Roth IRA is the way to go. Teen-owned UGMA or UTMA custodial accounts and brokerage accounts allow you to use the funds for anything. But in the first case, the parent manages the funds until the child becomes an adult, and in the second, the child manages the money.

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