Investment Accounts for Kids: A Guide for Parents in the U.S.
At NHI Money, we believe in preparing families for a financially secure future. One of the most powerful tools to achieve this goal is through investment accounts for kids. These accounts do not only serve the purpose of saving but rather nurturing dormant finances into powerful assets. Whether it is for long term saving, funding a child’s college, or generational wealth transfer, a child’s financial strategy can be revolutionary with the right investments.
In this guide, we’ll explore everything U.S. parents need to know—from the reasons to invest early to the types of accounts available and how to set one up. Let’s start with the “why”—because knowing the value behind the move is just as important as the mechanics.
Why Open an Investment Account for Your Child?
Opening investment accounts for kids isn’t just about future college tuition. It’s about teaching responsibility, offering tax advantages, and giving your child a financial head start in life.
Let’s look at three essential reasons to begin now.
The benefits of starting early
Time is the most powerful asset in investing. By starting early, even small contributions can grow substantially over time due to the effect of compound interest. For example, a $1,000 investment made when a child is five years old could more than double by the time they turn 18—assuming a modest average return of 6–7%.
A child with early investment exposure can graduate into adulthood with a solid financial cushion, helping them avoid student loans, afford a home down payment, or start a business. The earlier you begin, the less you have to invest over time to achieve the same goal.
A report by the North American Securities Administrators Association™ supports this strategy: compounding works best when money has time to grow.
How investment accounts help teach financial literacy
In addition to achieving goals, investment accounts also act as an efficient platform for getting children engaged with proper money management. Once children’s funds are invested in stocks, ETFs, or mutual funds, some imperative financial principles, including, risk, diversification, and market changeover, become clearer.
Many parents decide to include children in the account management process and even allow stock picking to some next generation members, which makes the kids more interested in the subject. This active exposure to finance develops a sense of responsibility towards money in the children.
As conveyed in a 2018 T. Rowe Price study, frequent money discussions among parents and their children tend to lead to improved responsible financial behavior for children.
Tax advantages of certain accounts
Several types of investment accounts for kids come with built-in tax advantages. As an example, some conditions allow 529 Plans and Roth IRAs to be grown tax free. Custodial accounts (UGMA/UTMA) also offer lower taxation on the child’s investment income through the kiddie tax regulation.
When managed correctly, these accounts not only increase wealth, but also enhance tax effectiveness. Parents have the opportunity to reduce their tax liability while simultaneously instilling in their children the significance of tax management which is critical yet frequently ignored within financial literacy.
Types of Investment Accounts for Kids
With regards to investment accounts for children, selecting the one that meets the child’s financial goals is indispensable. The various accounts aim at helping the children save for education, building long-term wealth or attaining early financial independence. Later in this article, we will discuss the most common types of investment accounts for children alongside their benefits and associated responsibilities.
A. 529 College Savings Plan
A 529 plan is an account meant for tax-free savings for education which has overarching tax benefits. These state-sponsored accounts allow your investment to grow tax-free, and withdrawals for qualified education costs are also tax-free.
Designed for Education Expenses
Plan 529’s main aim is to address the payment of educational qualifications such as higher learning tuition, text books,​ and also room and boarding fees. It is easier to make college more affordable. Although the funds can only be used for educational purposes, the tax advantages make it an attractive option for parents planning for their child’s college education.
Tax Advantages and State-Specific Benefits
The tax-free withdrawal for qualified educational expenses along with investment growth is one of the main advantages of a 529 plan. Some states even offer tax deductions or credits at the state level for contributions made to a 529 Plan, thus making these plans even more attractive investments.
How Funds Can Be Used or Repurposed
When children don’t end up spending all the funds allocated for education, there are still plenty of alternatives. You can change the account to another family member, like a sibling, or even yourself and avoid the penalty. If you decide to withdraw unused education funds, taxes based on income and an additional fee on the earnings will be levied.
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B. Custodial Brokerage Accounts (UGMA/UTMA)
As a result of the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, custodial accounts grant permission to parents or guardians of a minor to open and manage investments accounts in a child’s name, which have custodians until the child turns of age (usually 18 or 21, depending on the laws of the state).
How These Accounts Work and Who Controls the Funds
When you set up a custodial brokerage account, you take the role of the custodian, managing the account’s funds until the child is old enough to do so themselves. The funds within the account are considered the child’s assets and owned by them. However, the child cannot access these funds until they have control over them, and this is managed by a custodian until the child turns a certain age.
Investment Options Available
Custodial brokerage accounts allow investment in a variety of assets. These can include, but are not limited to: stocks, bonds, ETFs, and mutual funds. The ability of the parents to invest where they please allows for better foresight in planning the child’s finances because of the varied asset classes. Unlike 529 Plans, these funds are not limited to education, making the account much more flexible.
Transitioning Control to the Child
The account will be conferred to the child as they near adulthood. This will give them the freedom to access the funds for multiple purposes such as college tuition, buying a car, or even starting a business. For long-term goal setting, parents should think about this shift carefully because it creates new possibilities.
C. Roth IRA for Kids
A Roth IRA for kids serves as an excellent long-term retirement saving opportunity. Younger investors tend to have a preference for Roth IRAs over traditional IRAs because with Roth IRAs, there are no taxes on growth or at the time of withdrawal in retirement.
Eligibility Requirements
To set up a Roth IRA for a kid, they must have some form of earned income. They must either possess a job or take part in a business where they receive taxable compensation. The total contributions made into the Roth IRA cannot exceed the child’s earned income for the year and the IRS’s annual contribution limit.
Long-Term Benefits of Tax-Free Growth
Their primary benefit comes in the form of tax-free growth over extended periods of time. As young children have a longer time frame until they retire, the potential for compounding is enhanced. There’s plenty of opportunity for this growth which makes it easier for those that start early.
How Parents Can Contribute on Behalf of a Child
As long as any parent or guardian helps a child with their Roth IRA, those contributions must be kept within the child’s income. For instance, if a child has a part time job and makes $2000 during the summer, the maximum amount contributed in the year for the Roth IRA would be $2000. Funds contributed for Roth IRAs are subject to tax, however tax-free withdrawals are allowed during retirement.
D. Trust Accounts for Wealth Planning
A trust account is typically ideal for high-net-worth families who want to control how their children access assets. It comes with greater complexity than a standard account and can significantly enhance estate planning.
Best for High-Net-Worth Families
High-net-worth families often set up accounts with trusts to pass down wealth efficiently. They can ensure their children don’t receive the funds until they reach certain milestones, both age- and achievement-wise.
Legal and Tax Considerations
Along with specific legal restrictions, trust accounts come with strike taxation policies. Estate taxes can apply to the assets in the trust, depending on the estate’s value. Moreover, each trust comes with administrative and managerial fees. The terms of the trust also need proper framing to safeguard the funds as per the family’s intentions.
Best Investment Options for a Child’s Portfolio
When creating a portfolio for a child, the goal should be capital appreciation with reduced risk as the top priority. With proper planning, investing at an early age can set the foundation for true financial freedom. Get to know the following investment strategies for varying goals, risk tolerances, and timelines to best suit a child’s portfolio.
Here are three popular and effective asset classes to consider:
Stocks and ETFs: Long-term growth potential
Building wealth overtime can be accomplished through investing in stocks and ETFs. These investments, such as putting money into mutual funds when children are young, have the greatest potential in the long run. Focusing on stocks and ETFs give you an opportunity to take as much as possible through compound growth. An investment that not only provides returns on your principal, but also the interest earned on your principal is very beneficial.
Why Stocks Are Great for Kids
Stocks allow individuals to own a part of a company and include a child’s stake in the growth of corporations. Investing as a child opens many doors in the future as well through the proven gains of a stock market. Investing in old, stable companies or promising new industries work hand in hand. A child not only earns money, but helps create and grow their portfolio over time.
With ample opportunity comes great risk. Some parents are afraid of the unpredictable nature of stock markets as there is great potential for losses, but when looking from the perspective of using a stock portfolio for long term investment, risk is reduced. Spending funds on diversified portfolios that cover multiple industries and sectors makes it possible to earn money in the long run.
ETFs for Diversification and Low Costs
ETFs, or Exchange Traded Funds, are portfolios containing stocks, bonds, or other securities that focus on an index or a specified sector. Unlike other options available in the market, they are generally much cheaper and provide unconditional diversification which lowers the risk associated with individual stock purchases. Because of this, parents can easily add to a child’s portfolio without spending too much.
Using wide range ETFs that cover well known stocks like the S&P 500 helps build a foundation in investing. The child gets the opportunity to work on their investment from an early age and assists in diversifying their portfolio while reducing the risk of depending on one stock.
Index funds: Low-cost diversification
An index is a type of mutual fund that seeks to replicate the returns of a certain index such as the S&P 500 and the Nasdaq-100. Index funds are set up with a child’s portfolio in mind, making them one of the standard funds that are chosen because of their relatively low cost, simplicity, and high versatility.
Benefits of Index Funds for Kids
Index funds keep a diverse portfolio by ensuring that they invest in many different companies. This type of investing more often than not helps limit negative impacts from a downturn. Furthermore, this type of fund usually has lower management fees, which increases investment returns over the years.
Investing in such funds gives children the ability to slowly build wealth due to the index fund’s consistent growth. These funds can be one of the best options for parents who wish for their children’s investments to be managed without actively taking control.
Why Low Costs Matter
Because children will not be touching their investments for a long time, it is best to limit the fees charged to investment accounts. Actively managed funds generally have a lower expense ratio than index funds, which indicates that a smaller portion of a fund’s return is diverted to management fees and more is retained in the portfolio. If a child has an opportunity to grow their investment with compounded interest over time, then an index fund would serve that purpose best.
Bonds and fixed-income investments: Stability and security
Due to the fact that stocks and ETFs help increase cash flow, they are very useful, however, the fixed income and bond markets help make a portfolio a lot more stable while lowering the risk level. Compared to stocks, bonds are a safer investment because they’re basically loans given out to governments, municipalities, or corporations that pay interest regularly.
Why Bonds Can Be Beneficial for a Child’s Portfolio
In a child’s portfolio, bonds can enhance the diversification of the portfolio as well as lower the volatility of the income. Furthermore, bonds behave with less volatility compared to packed stock funds which makes them valuable in a diversified approach funneling dollars into the overall portfolio. Also, bonds pay out interest at fixed intervals and these dollars can be reinvested to increase the overall portfolio balance.
Bonds will enable younger children to enjoy steady growth. As the child ages, bonds should make a more significant part of the portfolio to reduce risk.
| Investment Type | Ideal For | Risk Level | Key Benefit |
| Stocks & ETFs | Long-term wealth building | High | Strong growth potential |
| Index Funds | Balanced long-term diversification | Medium | Broad exposure, low fees |
| Bonds & Fixed Income | Short- to mid-term savings | Low | Predictable income, stability |
Types of Bonds to Consider
Consider these types of bonds for your child’s portfolio:
- U.S. Treasury Bonds: These are backed by the U.S government and are considered to be one of the safest investments.
- Municipal Bonds: These are issued by the local and state government. They have tax benefits, especially for high-income earners.
- Corporate Bonds: While being more risky, these bonds issued by corporations have higher yields.
Even though bonds will not generate the high returns stocks do, they provide a consistent, long-term investment option that is relatively low risk.
How to Open an Investment Account for a Child
Opening investment accounts for kids has become easier thanks to digital platforms and streamlined regulations. With just a few documents and the right financial partner, you can start investing for your child in less than an hour.
Here’s a step-by-step guide:
Choosing the right type of account based on financial goals
Determine what you’re saving for. Is it a college fund, retirement savings, or general wealth building?
| Goal | Best Account Type |
| Education | 529 College Savings Plan |
| Long-term savings | Custodial Brokerage Account |
| Retirement | Roth IRA for Kids |
| Inheritance planning | Trust Account |
Your goal shapes everything from tax planning to investment choices.
Selecting a brokerage firm
Choose a brokerage that fits your needs—ease of use, low fees, and strong customer service.
| Brokerage Firm | Notable Features |
| Fidelity | Offers youth accounts, no fees, great mobile platform |
| Vanguard | Ideal for long-term index investing |
| Charles Schwab | Trusted name, broad investment options |
| Acorns Early | App-based, round-up investing for kids |
Always compare account fees, customer support, and educational tools before committing.
Funding and managing the account
You can start with as little as $5–$100 depending on the platform. Many brokerages allow automatic contributions. Set a consistent deposit schedule—even $25/month grows substantially over time.
Once the account is funded, select a diversified portfolio. Review performance annually, and gradually involve your child in the decision-making. This is where true financial education begins.
Tax Implications and Legal Considerations
Opening investment accounts for kids isn’t just about saving money—it’s also about understanding the tax and legal rules that apply. Each account type comes with specific tax benefits and reporting requirements.
Failing to account for taxes properly could reduce returns or lead to penalties. This section highlights the essential rules you should know to avoid surprises and optimize your child’s investments legally and efficiently.
The Kiddie Tax and how it applies to unearned income
The Kiddie Tax is something you need to pay attention to when your child’s investment income crosses a certain limit. For 2024, the threshold is set at $1,250, which will be tax-exempt. The subsequent $1,250 will be taxed at the child’s tax rate. Everything beyond that will be taxed at the parent’s marginal tax rate.
This tax was created to prevent parents from shifting assets to children to avoid higher tax rates. It mostly applies to UGMA/UTMA accounts.
Reporting investment gains and tax deductions
In the case your child is receiving dividends, interest, or capital gains, you may be obligated to submit IRS Form 8615. In the case of a custodial account, you have to report the investment income under the child’s tax return.
As far as 529 Plans are concerned, they’ll usually not have to deal with this problem since qualifying withdrawals are tax-free. The same goes for Roth IRAs whose long-term investment makes them appealing due to tax-free growth.
Parents aren’t allowed to write off custodial or Roth IRA accounts, but they might claim state tax write-offs for contributions made to a 529 Plan considering the state they reside in.
Estate planning considerations for investment accounts
If you’re building generational wealth, it’s important to include investment accounts for kids in your estate planning. For large portfolios, trusts can be powerful tools.
Trust accounts offer control over when and how a child accesses funds. You can also name beneficiaries for 529 Plans and Roth IRAs to simplify inheritance.
Consulting with an estate attorney ensures your plans align with tax laws and your long-term vision.
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FAQs About Kids’ Investment Accounts
What is the best investment account to open for a child?
It depends on your goal. For education savings, a 529 Plan is ideal. For general wealth building, a custodial brokerage account offers more flexibility. If your child has earned income, a Roth IRA is a smart retirement tool.
Can I set up an investment account for my child?
Yes. Parents, guardians, or even grandparents can open most types of investment accounts for kids. You’ll typically need the child’s Social Security Number and a funding source.
Which is the best investment for a child?
Index funds are often best for kids. They offer low cost, broad diversification, and long-term growth potential. Stocks in familiar companies also help kids learn how markets work.
How to invest $1000 for a child?
Start with a custodial account or 529 Plan. Choose a mix of index funds and ETFs. Consider automatic monthly contributions if your budget allows.
Conclusion
One of the best moves to take for your child is investing their future finances early. Opening a specialized account for children unlocks numerous features, guides them through financial education, and strengthens future aspirations including retirement and furthering one’s education.
Is your intent to create a college fund, train responsible spending habits, or plan wealth transfer down the generation? No matter the circumstance, there is always a fitting account type tailored to the user’s needs. At NHI Money, we help families achieve growth confidence. With the right plans and steps today, your child is well on their way to having a brighter future. Together, let’s ensure a treasure-filled future.
