Opening a Brokerage Account for Your Child
Brokerage accounts for kids are generally custodial, with the parent or guardian managing the assets until the child reaches adulthood. Only the parent or guardian can open the brokerage account, even when the account bears the child’s name. When the child reaches maturity — the legal age varies by state — they would take possession of the account.
Overall, the process for how to open a brokerage account for a child is fairly straightforward.
Why open a brokerage account?
A brokerage account is an investment account that operates through a brokerage firm. When you open a brokerage account, you deposit money into it, then use that money to buy securities. You can also sell securities that you’ve purchased. Depending on where you open a brokerage account, you might be able to trade:
• Stocks
• Mutual funds
• Exchange-traded funds (ETFs)
• Real estate investment trusts (REITs)
• Bonds
• Foreign currencies
• Options
• Futures
• Cryptocurrency
Some brokers may allow you to trade on margin, meaning you can borrow money to execute trades. (Trading on margin and investing in certain asset categories may not be available for custodial accounts, however.)
You may be charged commissions or other fees to execute trades, but there are no limits on how much you can invest. That’s roughly how a brokerage account works.
A brokerage account is not the same thing as a retirement account. When you sell assets at a profit in a brokerage account, you may have taxes due or other tax impacts. You can buy and sell investments at your own pace, withdrawing money as needed.
With an Individual Retirement Account (IRA), you can invest in many types of assets, but certain items (such as collectibles) are disallowed in most accounts. IRA holders must wait until age 59 ½ to withdraw funds without any tax penalty (some exceptions apply, such as disability). Early withdrawals from a traditional IRA are taxed at your ordinary income tax rate, plus you’ll generally incur a 10% additional penalty. When deciding on a taxable brokerage account vs. IRA, choose the one that furthers your financial goals.
Recommended: Popular Types of Retirement Plans
Can Children Have Brokerage Accounts?
They can, but they are not allowed access to the account’s money or assets. In almost all cases, such brokerage accounts are custodial, meaning the parent is responsible for managing the money until their child reaches adulthood.
Numerous discount brokers offer investment accounts for kids online. Some brokers have also introduced hybrid products for teens that allow them to save money, spend, and invest all in one place with the supervision of their parents.
If you’re looking for a hands-on way to teach kids about how markets work, a brokerage account could be a great idea. But if you want to teach them about money more gradually, a kids’ savings account might suffice for now.
Can a Child Have a Brokerage Account in Their Name?
A custodial account is technically in the child’s name, even though it’s controlled by the parent. So yes, a child can have a brokerage account in their name. Of course, they themselves can’t open the account without the help of a parent.
How to Open a Brokerage Account for a Child
Once you know how to open a brokerage account for your child, doing so isn’t too difficult.
The first step is choosing a brokerage that offers investment accounts for kids. Factors to consider in making your decision could include the range of investment options, how easy it is to access the account, and the fees.
The next step is deciding which type of account to open. There are three possibilities to choose from when opening a brokerage account for a child.
Opening a Guardian Account
A guardian account allows you to invest money on behalf of your child. All of the money in the account technically belongs to you, as does any tax liability associated with the sale of assets in the account. You (but not the child) can withdraw money from the account for any reason. Once the child turns 18, you can decide whether to hand the money in the account over to them.
Opening a Custodial Account
With a custodial account, the parent opens the account but the assets in it belong to the child. You can direct investment decisions while the child is a minor, and any tax liability is assessed at their rate. Withdrawals are allowed only for expenses benefitting the child. Once the child reaches adulthood, they automatically become the owner of the account.
Opening an IRA Account
If your child has earned income from a part-time or summer job (even babysitting or lawn mowing) for at least a year, you might consider opening a custodial IRA for them. With a custodial IRA, you direct the investments until the child turns 18 (or 21 in some states). At that point, the account becomes their property.
One key distinction: The IRA has annual contribution limits, but other types of custodial accounts do not. Each year the maximum contribution is the amount equal to the child’s total earnings; in 2023 the amount is capped at $6,500. (If a child earns no money in a given year, the maximum contribution is $0.)
The Roth IRA, which holds post-tax dollars, may be a better choice for a kid than a traditional one funded by pre-tax dollars. The benefits of the traditional IRA — such as lowering your taxable income during your earning years — won’t help a young person very much.
Types of Brokerage Accounts a Parent Can Open for a Child
When opening a custodial account for a child at a brokerage, you have two options: a Uniform Transfers to Minors Act (UTMA) account and a Uniform Gifts to Minors Act (UGMA) account. Most states recognize both account types. With either one, you control the account until the child reaches the age of termination, which in some places may be later than the age of majority.
UTMA Account
UTMA accounts allow minors to hold securities without the creation of a separate trust. This type of account permits you to hold many types of assets, including:
• Stocks
• Bonds
• Mutual funds
• Real estate
• Fine art
• Precious metals
• Patents
• Royalties
• Shares in a family limited partnership
The IRS taxes earnings in a UTMA at the child’s tax rate, up to a certain limit. For 2023, the limit is $2,500. Any gifts made to a UTMA on behalf of your child are irrevocable, meaning once you put the money in it becomes theirs; you can’t take it back out again. Any withdrawals must be used to pay expenses for the child, such as school tuition.
UGMA Account
A UGMA account is similar to a UTMA account in terms of tax treatment and who actually owns the assets in the account. The main difference between a UGMA and a UTMA account lies in what you can invest in. For a UGMA account, those are typically limited to stocks, bonds, and mutual funds. So if you’re choosing between a UTMA and a UGMA, it’s important to consider which types of assets you’d like to keep in the account.
Investing for Kids
A brokerage account can be a useful teaching tool for helping kids to grasp such concepts as:
• How investing works
• Compound interest and why compounding matters
• The importance and value of saving money
Kids who learn about money when they’re young are likely to have better financial habits as adults. Also, a study from Brigham Young University found that they have more satisfying interpersonal relationships in early adulthood because they’re less likely to stress over money.
Tips for Choosing the Right Broker
If you’re navigating how to open a brokerage account for your child for the first time, you may not be sure what an investment broker does or how to decide where to keep the account. When you’re seeking out the right broker, here are a few key questions you could ask as you narrow down the options:
• Does this brokerage firm offer investment accounts for kids?
• What types of brokerage accounts for kids are available?
• Is there a minimum initial deposit to open the account?
• What are the fees?
• Which investments will I be able to trade in the account?
If you have an existing brokerage account for your child, consider whether moving it to a different broker makes sense. For example, you may want to move if you believe your current brokerage is charging too much in fees. If you do decide to switch, it’s easy to request a brokerage account transfer online.
The Takeaway
A brokerage account for your child would probably take the form of a guardian account or a custodial UGMA or UTMA account. Knowing what types of assets you intend to deposit may help you determine what kind of account works best for you. For kids earning wages, a custodial IRA may be a good fit, allowing 2023 contributions of up to $6,500.
Hybrid save-and-spend accounts designed for teens can help them learn about investing while under adult supervision. In all of these cases, the parent oversees the accounts until the child reaches adulthood.
If you’re looking to open an online brokerage account for yourself, SoFi offers easy all-in-one investing. You can open an investment account with SoFi and start trading stocks, ETFs, or IPOs, if you’re 18 or older. SoFi does not offer custodial accounts. SoFi doesn’t charge management fees, and SoFi members have access to complimentary advice from professionals.
FAQ
Can I open a brokerage account in my child’s name?
Yes, you can open a custodial brokerage account for your child in their name. Transfers to a custodial account are irrevocable, but you’ll have control of the account and make the investment decisions until the child reaches adulthood. In the meantime, the assets in the account will belong to the child.
Can I open a brokerage account for a family member?
Generally, you can open a brokerage account for a family member only if that person is your minor child. You are allowed to establish a 529 college savings plan on behalf of other family members, including siblings, nieces, nephews, or cousins.
Can I buy stocks for my child?
Yes, you can purchase stocks for your child. You can make the purchases through a custodial account. There are also financial apps that allow you to purchase full or fractional shares of stock for your child.
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