Can I Open a Brokerage Account for My Child?
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Parents who want to make smart financial decisions and teach their children to do the same often ask, "Can I open a brokerage account for my child?"
The good news is yes, you can open a brokerage account for your bundle of joy (or precocious toddler, or sullen preteen). The even better news is you'll have a few more account types to choose from than you would if you were opening one for yourself.
When you're ready to open a brokerage account for a child, the first thing to research is the types of accounts. Options include:
The sections below will cover each of these options in more detail.
With a custodial brokerage account, you don't own the money -- your child does. As long as your child is a minor, you control the account, but any withdrawals (or dividends) can be taxed to your child, who will likely have a much lower tax rate than you. As the custodian, you can't make withdrawals except to cover certain expenses for the benefit of the child. In other words, you give up some long-term control (as well as ownership), but it's usually a better deal from a tax standpoint.
There are two types of custodial accounts:
Outside of the fact that UTMA accounts give you more investment options, the other difference between these accounts is where they're available. UGMA accounts are available in every state. UTMA accounts aren't available in South Carolina and Vermont.
There's no maximum contribution limit for custodial accounts. Custodial accounts are considered the child's asset. That means they can impact financial aid eligibility.
A relatively new option is a teen-owned brokerage account. Fidelity introduced this option with Fidelity Youth™, a free app available for those ages 13 to 17. It allows teens to manage and invest their own money.
This is not a custodial account. It's owned by the teen, not the parent. However, a parent or guardian must open the account on behalf of their teen. The teen can invest in U.S. stocks and Fidelity mutual funds, and parents can view trades and transactions in the app.
While Fidelity Youth accounts don't have trade limits, there is generally a $30,000 annual maximum that can be added to the account.
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Your 10-year-old probably isn't wondering how they'll get by on Social Security, but you might be ready to start planning for their future. If your child earns money, you can start saving for retirement by investing now.
One type of custodial account for a child is an IRA account. To have a regular IRA or a Roth IRA, the owner of the account must have earned income. If your kid is working (and earning income) in some capacity -- for example, babysitting or mowing lawns -- that qualifies. Allowance from parents is not considered earned income by the IRS.
As the parent, you'll open the custodial IRA account or custodial Roth IRA. Junior can contribute earnings to the IRA, up to annual limits (the annual limit is $7,000 for 2024). There's no rule that says you can't contribute the money for your child. The IRS doesn't care whose bank account is used to fund the account. The only rule is that the amount can't exceed the annual limit or the actual earned income -- whichever is lower.
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In addition to retirement account contributions, the IRS lets you invest up to $2,000 per year in a Coverdell.
The Coverdell education savings account is a tax-deferred investment account for a child to help pay for -- you guessed it -- educational expenses. The contribution limit is $2,000 per year, and earnings are tax-deferred. Withdrawals used for qualified education expenses before the child's 30th birthday are tax-free. While Coverdell accounts have lower contribution limits than 529 college savings plans, they provide far more investment options. A Coverdell can be used for qualified education expenses starting as early as kindergarten.
Couples filing taxes jointly must have a combined modified adjusted gross income (MAGI) of less than $190,000-$220,000 ($95,000-$110,000 for single filers) to be eligible to contribute to a Coverdell. Contribution limits phase out at higher incomes.
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Read more about brokerage accounts:
Yes, you can start an investment account for your child. Many stock brokers offer custodial accounts, a type of investment account that a parent or guardian can open for a child. You can use a custodial account to make investments for your child, and when they turn 18, control of the account transfers to them.
No, you can't open a Robinhood account for your child. Robinhood doesn't offer custodial accounts.
Yes, you can open a Schwab account for your child. A Schwab One® Custodial Account is an account you can open for your child and manage for them until they turn 18.
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