Can I Open a Brokerage Account for My Child?

Want to open a brokerage account for your bundle of joy (or precocious toddler, or sullen preteen)? The good news is, you can. The even better news is, you'll have a few more choices on what type of account you're going to open for your child than you would if you were opening one for yourself.

If your child has no earned income, then put that kid to work! Just kidding. If your child doesn't get a paycheck, then you can choose between two types of accounts where there are no maximum contribution limits. The first is a guardian account, in which you own the money. It's yours. You can withdraw it for any reason you want, and you are the one who is liable for the taxes on the earnings. You've got total control, and the price for this is that you pay taxes at your own tax rate. Practically speaking, then, this type of account is basically a way for you to informally earmark funds for your child in an account in your name.

The other type of account is a custodial account, where you don't own the money -- your child does. As long as your child is a child, you still control the account, but any withdrawals (or dividends, for that matter) are taxed at your child's rate. This is, of course, generally lower than your own. In other words, you've given up some long-term control (as well as ownership), but it's usually a better deal from a tax standpoint. There are two kinds of custodial accounts: the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA).

IRA accounts are another alternative for some kids. In order to have a regular IRA or a Roth IRA, the owner of the account must have earned income. That means that you cannot open one of these for your child until she is actually earning income. If your little kaboodle has begun child modeling at the age of four, or if you've decided to submit her for some friendly (and lucrative) medical experiments (shame on you!), then she qualifies. She can have an IRA for her earned income, up to annual limits of $4,000 per year in 2007 and $5,000 per year thereafter.

The Education IRA is in a category all its own. Your child could have a traditional IRA or a Roth IRA, but you can only invest a total of $4,000 or $5,000 yearly into one of those. The $2,000 annual maximum that you can invest in an Education IRA is in addition to that traditional or Roth IRA contribution.

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  • Report this Comment On December 01, 2012, at 10:22 PM, prginww wrote:

    Nice little article, but not as straight-forward as she(*) makes it seem. Lurking in the woodwork of custodial accounts is that dead hand of federal tax bureaucracy with a "kiddie tax" on your bundle of joy's assets.

    Do a search on "kiddie tax" to find the current tax structure and age hurdles (as of late 2012 these amount to having any of your child's income earnings above $1900 taxed at the highest bracket rate of the highest taxed parent; has a brief article on the history of this tax). No free lunch here. Since your child is apparently being primed to be one of the infamous 1%, government is stepping in to ensure that the budding plutocrat pays to support everyone else. And, although you have irrevocably turned those assets over to your child, should you have the misfortune to pass away before the child receives custody of the account, the assets will be considered part of your estate and taxed accordingly.

    * The apparent gender of the author, given the politically correct pronoun usage.

  • Report this Comment On December 01, 2012, at 11:41 PM, prginww wrote:

    Do not use custodial accounts unless you are willing to see the money turned over to the recipeint as soon as they are 18. If you are saving for college they may end up buying a BMW at 18.

    With a guardian account you can release the money for a specific purpose.

  • Report this Comment On August 11, 2013, at 12:01 PM, prginww wrote:

    what about joint accounts with adult children

  • Report this Comment On May 25, 2014, at 2:11 PM, prginww wrote:

    Hi I am a CPA with a Master's Degree in Taxation and also have licenses in securities, insurance and real estate. Don't be so hard on the author of the article. The cap on the kiddie tax is often not reached or never reached by most children's accounts. If the income is also "earned income" the child can offset that with their standard deduction. Parent's hiring their children, can get a deduction in their business and then the children can contribute to a Roth IRA, a wonderful solution. Under some circumstances the kids can be exempt from SS/Medicare taxes from their payroll withholding taxes too. More importantly, the children can learn about work, responsibility, taxation, finance and potentially accounting which will allow them to function better in the years ahead of them. As you would expect, my boys are working towards being Eagle Scouts, I am the Scout Master of our Troop and hope my boys can get into their parent's alma mater, U.C., Berkeley. Go Bears!!!

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