Using the best investments for kids will start them off with funds that can change their life!
Investments can help your child jumpstart them in learning how to invest for their financial freedom before becoming adults and much more.
But finding the best investment vehicles for your kid can be challenging when you’re new to investing. You want to find something that will grow with them over time but is also safe and easy to understand.
Quick Picks: Best Investments For Kids
For all you parents raring to go, here are the best accounts you can start today to grow more wealth for your kids:
- Custodial Account: Acorns
- HYSA Account: Chime
- Best For Beginners: Robinhood
- Robo-Advisor: Betterment
General Investments For Kids
One of the smartest and most reliable investments you can make for your child’s future is in general investments.
These investments can be used for anything, whether college tuition, a down payment on a first home, or anything else.
Some general investment options to open to investing money for kids include:
1. Custodial Brokerage Accounts
A brokerage account can be opened for children under 18 years of age at most brokerage accounts by a parent through a custodial account, where an adult (the custodian) is legally responsible for the account and can make investment decisions on behalf of the child.
With custodial investing, you can buy stocks, bonds, and other investments on behalf of your child. This can help your child’s investments grow faster, and it can also help reduce the amount of money you have to pay in taxes each year.
With custodial accounts, the assets are held in the child’s name, with the parent serving as custodian. This can be a great way to teach kids about money and investing at an early age.
Although there is always the potential for some risk, over time, the stock market has proven to be a fairly stable investment option with the potential for good returns.
Places you can start a custodial account for stocks are:
For parents looking to start investing for their children, Acorns is a great option.
With its Acorns Early program, parents can set up an account and make regular deposits for their kids. When the child reaches the age of 13, they can take control of the account and start making their own investment decisions.
You can check out more about what Acorns offers in our in-depth review!
Another way to invest in stocks for kids is by opening an account in your name at Webull. You can start investing in the stock market and even make a game for teaching your kids about stocks.
Webull has “Paper Trading” for kids to get started in the market without risk. You can trade with “fake” money and teach kids how the market works without risking your own money.
One of the best ways to teach children about the stock market is with Stash.
With Stash, you can open a custodial account (called Kids Portfolio) for just $5 and invest in stocks and ETFs on behalf of your child. This is an excellent way for parents, grandparents, and friends to start investing for children.
Want to know more? Read our Stash review to see what else you can invest in and why this platform may be the right pick for you.
M1 Finance is an investing platform that offers commission-free trading and a variety of pre-built portfolios to choose from.
M1 is a helpful Robo-advisor that can give you a hands-off way to invest for your kids, including picking from their premade portfolios to give them a leg-up on starting solid investments.
Learn more about opening an M1 Finance account and start investing for your kids with our M1 Finance review.
2. Mutual Funds
When it comes to investing for your kids, mutual funds are a great option. A mutual fund is a type of investment that pools money from many investors and invests it in a mix of assets, such as stocks, bonds, or short-term debt.
The fund is managed by a professional money manager who tries to grow the fund by investing in securities that will provide a higher return than the fund’s benchmarks, such as the S&P 500 Index.
Mutual funds give investors access to a diversified portfolio of securities, which can help mitigate risk and produce steadier returns than investing in individual securities.
They are often used as part of a long-term investment strategy rather than a short-term investment strategy, such as retirement planning.
Be sure to consider the fees associated with the fund. While all funds have fees, some have higher fees than others. These higher fees can eat into your investment returns, so it’s essential to choose a fund with reasonable fees.
Rates generally range between .5 % – 1.5% for actively managed funds and .2 % for passively managed ones.
An example is if you invest $10,000 and the fund has a 1% expense ratio, then you will pay $10 for every $1,000 you have invested.
3. High-Yield Savings Account (HYSA)
An average savings account will only earn you 0.07% per year– meaning for every $100 you put into savings, you get $0.07.
It’s free money, but it isn’t as much as you can get elsewhere!
Many banks offer a special tax-advantaged savings account for your child’s future with higher interest rates than regular savings accounts.
A high-yield savings account (HYSA) is essentially a better savings account with more interest, so you get money back more often on what you deposit.
This is a safe investment option since there is little to no risk involved- it’s just APY giving you more funds as your money hangs out in your account.
CIT Bank: CIT Bank offers an HYSA with a 0.65% APY (annual percentage yield). A $100 minimum deposit is required to open an account, but no monthly fees.
So your $100 can earn you $0.65 instead of only $0.07!
Chime: Chime offers an HYSA with 0.50% APY, no monthly fees, and minimum balance requirements. This bank also offers a cool feature called “round-ups,” which rounds up your spare change from purchases made with your Chime debit card and invests it into your savings account.
Using Chime, you can make $0.50 for every $100, again a big improvement over regular savings accounts!
4. Exchange-Traded Funds (ETFs)
An ETF, or exchange-traded fund, is a type of investment that allows you to invest in a basket of assets. ETFs are a good investment for kids because they offer diversification and allow you to invest in various asset classes.
They offer a diversified portfolio of investments that can be bought and sold just like stocks. They’re also a more affordable option than other general investments.
It’s important to discuss the ETFs with your financial advisor to make sure they fit your investment goals and are appropriate for your risk tolerance.
5. Index Funds
When it comes to investing for kids, there are many options to choose from. But one of the best and simplest ways to get started is by using index funds.
Index funds are mutual funds that track an index, which means that the fund will invest in a basket of stocks that match the index.
This is a great option for kids because it offers a way to invest in a wide range of companies without picking and choosing individual stocks.
It also provides diversification, which is essential when it comes to investing. And because index funds tend to have lower fees than other types of mutual funds, more of the money you invest will go towards growing your child’s account.
Bonds can also be a good option for making investments for kids because they offer a relatively low-risk way to invest.
They also have the potential to provide a steady stream of income, which can be helpful if the child is saving for a long-term goal such as college tuition.
Bonds are a debt instrument in which the issuer (a government or company) borrows money from investors. In exchange for lending the money, the investors receive a fixed interest rate over a set period.
There are various types of bonds, but government treasury bonds are often considered the safest option. This is because they are backed by the issuing government’s full faith and credit, which means there is little risk of default.
A US government Series I bond offers a fixed rate with a variable rate adjusted twice a year in response to inflation. The bond pays interest for 30 years or until you redeem it, and it’s backed by the United States government, which is typically one of the world’s best credit risks.
The interest rate on your I bond will be the current rate for the first six months that you own. For example, an I bond issued between May and October 2022 will pay 9.62% interest. You’ll continue to earn the same rate for your bond for six months, and then in October, the bond will adjust to the announced new rate.
7. Certificates Of Deposit
Certificates of deposit (CDs) are another option for investing for kids. CDs are a type of savings account in which the money is locked in for a set period.
CDs typically offer higher interest rates than regular savings accounts, which can be a good way to grow the money over time.
They also tend to be very low-risk, which can be helpful for kids just starting with investing.
When choosing a CD for kids, there are a few things to remember: find a CD that offers a reasonable interest rate and make sure the CD is FDIC insured.
This will help protect your child’s investment if the bank fails!
8. Money Market Account
A money market account is a type of savings account in which you can deposit cash and write checks. The interest rate on a money market account is typically higher than the interest rate on a checking account.
Money market accounts are also relatively low-risk, which can be helpful for kids who are just starting with investing. They offer a way to save for a specific goal, such as college tuition or a down payment on a house.
When choosing a money market account for kids, there are a few things to keep in mind.
- First, find an account that offers a reasonable interest rate.
- Second, make sure the account is FDIC insured. This will help protect your child’s investment if the bank fails.
Investing: Tax-Exempt Accounts
When you begin investing money for your kids early, you want to look at investments that offer tax advantages.
A tax-exempt investment account allows you to invest money for your kids without paying tax on the earnings.
There are a few tax-exempt accounts, including 529 plans and custodial IRA accounts:
9. 529 College Savings Plan
A 529 college savings plan at Upromise is a tax-advantaged investment account to help families save for their child’s future college fund.
Investing in a 529 plan is one of the best ways to save for college, as it offers several key benefits:
Tax-deferred growth: All earnings on your investment grow tax-deferred, which means you won’t pay tax on them until you withdraw the money to pay for college expenses.
Tax-free withdrawals: The tax law allows withdrawals to be used to pay for qualified higher education expenses, such as tuition, room, board, and books, which are tax-free.
Flexibility: 529 plans can be used at most colleges and universities in the United States and some foreign schools.
In most states, withdrawals from a 529 plan used to pay for qualified education expenses are also exempt from state income tax.
Qualified education expenses can include tuition, activity fees required by their college, education fees, and a few other things- but it doesn’t include room and board, insurances (medical or property), student health fees, etc.
There are no contribution limits to a 529 college savings plan, so you can contribute as often as you can and keep that money growing at your own pace.
The IRS considers 529 contributions to be finished gifts for federal income tax deduction purposes, so anyone who donated money to the 529 can claim a $16,000 annual gift tax exclusion per beneficiary in 2022.
10. Traditional IRA
A traditional custodial IRA is a good investment for your child’s future. Your child can start saving for their future now, and they will thank you later.
To open a custodial IRA with and then contribute to a child’s custodial account requires that the child have taxable income. An IRA may be opened for your child, regardless of age, if they have earned income.
The money in this account can grow tax-free and be used to save for retirement or other expenses in the future.
A typical IRA is considered pre-tax since all of the money, your contributions, and any earnings they’ve accrued are regarded.
When you withdraw from a traditional custodial IRA during retirement, you must pay taxes on the amount (at your then-applicable tax rate).
Per the IRS, contribution limits are:
- $6,000 ($7,000 if you’re age 50 or older), or
- If less, your taxable earned income for the year
We get that starting a retirement account for a kid sounds confusing, so be sure to talk to a financial advisor to see if a traditional IRA custodial account is suitable for your child’s future retirement savings.
11. Roth IRA
A Roth custodial IRA is a good investment option for children with taxable earned income because their contributions will grow tax-free, and the account offers flexibility.
Just like traditional IRAs, one of the IRS guidelines for opening a Roth IRA is that your child(ren) must have taxable earned income to open a custodial Roth IRA.
In a Roth IRA, custodial account contributions grow tax-free, meaning that the account holder will not have to pay taxes on the money when they withdraw.
This can be a significant benefit, especially if the child’s taxable income is low when they start investing in a Roth IRA. Additionally, a Roth custodial IRA offers more flexibility than other types of investment accounts.
For example, the account holder can withdraw money from a Roth IRA without penalty. This can be helpful if the child needs to access the money from the Roth IRA for an unexpected expense.
One place where you can open a Custodial Roth IRA is M1 Finance, with their M1 Plus plan.
Investing: Taxable Accounts
12. Non-Custodial Brokerage Account
One thing – you will have to pay the capital gains taxes based on your own tax rates instead of the child’s rate.
According to this tax, parents are responsible for paying the marginal income tax rate on all unearned income earned in the account. This regulation applies equally to any unearned income accrued by minors under 19 or full-time students under 23.
13. UGMA/UTMA Trust Accounts
UGMA stands for Uniform Gifts to Minors Act, and UTMA stands for Uniform Transfers to Minors Act. These are two different ways to set up an account for a minor child.
With either type of account, the money is held in a custodial account for the child until adulthood.
When choosing between a Uniform Gifts to Minors Act and Uniform Transfers to Minors Act account, there are a few things to remember:
- Consider how you want the money to be used
- Think about how much control you want over the account
- Consult with a financial advisor to see which type of account is right for your child
Once the money is deposited into the account, it can be used for various purposes, including education expenses, extracurricular activities, and even their first car.
Why Invest For Your Kids
Kids need to learn about money if they’re going to be wise with it in the future.
This can be done by giving them an allowance, helping them open a bank account, and teaching them how to budget, but investing takes it a step further!
When you invest money for your kids, you can help them develop good financial habits that will last a lifetime. And as they grow older, you’ll have started creating generational wealth for them to use or continue growing.
Here are some of the other benefits of investing money in your kids:
Teach Your Kids About Investing
Studies have shown that people who start investing early in life are likelier to have a higher net worth as adults, so starting portfolios for your kids can make them rich!
But the extra money or being rich quicker isn’t the true benefit. Learning about investing young can mean they are more involved in saving for their retirement, and they’ll skip the confusion or pitfalls that adults make when they’re new to investing.
Teaching kids about investing can be tricky as you want to get them involved and well-informed without throwing too much information at them and overwhelming them.
Start small with budgeting and money basics, and as they get older, add more into your lessons to improve their financial literacy.
You definitely want them to understand the basics of investing before you start teaching them about specific investing fundamentals, contribution limits, or go over the child’s tax rate on brokerage accounts.
Too much too soon can make them less willing to learn, so start easy. Buy them financial literacy books geared for their age group. As they get older, encourage them to take personal finance courses in school or your local library when they’re available.
Pay for Your Child’s Future Expenses
I’m sure that just like our girls and us, you want to ensure your children have a bright future and have the most of everything.
One way of ensuring this is by investing money wisely. Putting money aside now can help pay for your kids’ future expenses, such as a car, marriage, or house down payment.
But investing in 529 plans can put money away specifically for college, like paying for classes, textbooks, and school supplies they need.
Less Student Loan Debt
One that note, paying for college is expensive, and many leave with a significant amount of student debt.
The average adult leaves college with almost $33,000 in debt, but over 7 million people with debts ranging from $50,000 to $200,000+!
Your children have the chance to grow up wiser about spending money and saving money, but let’s face it, school is expensive, and many of them will want to go to pursue their jobs.
Investing can help offset those costs and help reduce their student loan debt. Fewer debts leaving college give them more chances to save after college for their car, a comfortable starter home, and more.
Grow More Money With Time
Another reason kids should invest early is that the earlier you invest, the more time your money has to grow.
If they start investing in their 20s, that money will take time to grow, and by then, they will have credit card debts, possibly a mortgage, student debt, and maybe more.
Investing now and having X years to grow before graduating high school is the smart choice!
Over this time, your investments make more money, and you will be able to provide a better future for your children.
But even if your kids are already in high school, it’s never too late to begin investing! It’s still better to give them extra time to earn returns and money on their investments.
The best investments for kids have a few things in common: they offer growth potential and provide compound interest, passive income, and should be tailored to the child’s age and investment goals.
It’s never too early to start investing for kids- the sooner you start, the more time their investment has to grow and the more funds they will have to use for the important things in life.
You can help your child secure a bright financial future with careful planning, and various investments can be made for kids, including stocks, bonds, mutual funds, and 529 plans.