The Complete Guide to Brokerage Accounts for Kids And Teens
Setting up a brokerage account for your child can be very beneficial for them over the long term, and help them understand the stock market. But navigating the world of brokerage accounts for your kid or teen can be very difficult if you don’t understand the different types.
In this article, I explain the different types of brokerage accounts, including custodial accounts, Roth IRAs, regular brokerage accounts under your name, and joint brokerage accounts. I also explain the confusing element of what happens when your child turns 18.
Picking the right brokerage account is dependent on a few factors. Whether or not your child is legally earning income and his level of knowledge in investing are the main ones. At the end of the description of each type of account, I will compare and contrast them with the others and show you which brokerage accounts are best for you.
A custodial account is an investment account that belongs to a minor. The money is legally theirs, but you, as the parent (sometimes also called the custodian) are in charge of managing it until they are eighteen years old.
You can only withdraw money from that account before they are eighteen if it’s for the sole benefit of the child (ie: college tuition). The custodian is the person in charge of managing the custodial account on behalf of the child.
Is it Right For You?
I don’t recommend this unless your child is very young or you are willing to give your child control of the brokerage account. The only real difference between a custodial brokerage account and a regular brokerage account under your name is the tax structure, as long as you’re willing to give your child control of the custodial brokerage account.
A custodial brokerage account is taxed under the Childs tax bracket, and since most kids and teenagers don’t earn much (legally) earned income, your child will likely have to pay much less taxes than you. Another benefit is that is is much easier to transfer the account to the child when he/she turns 18 years old. The process is seamless, and on many platforms the account can be turned into a regular brokerage account automatically.
Under the UGMA/UTMA act, any individual (like friends or family) can transfer money to your Childs account tax-free for up to $15,000. It is important to note that these gifts to your Child’s custodial account are irrevocable.
Regular brokerage accounts
A regular brokerage account is one under your name that your child has control of. My recommendation is Greenlight because it’s a great platform and you’ll also get $50 when you sign up (which can pay for five months of the best plan.)
Is it Right For You?
Creating a regular brokerage account is simple and easy, but from a tax perspective it is inefficient, so if your child has a substantial amount of capital and you feel confident giving your child control, then the best option would probably be a custodial account.
A Roth IRA is a tax-advantaged brokerage account, similar to a regular IRA but instead of paying taxes once you take money out of the account (like you do in a regular IRA) you pay taxes on the money once you put it into the account. Since your child is very likely at a lower tax bracket than he or she will be when an adult, you can potentially save money for your child using a Roth IRA.
Roth IRAs have no minimum age requirements, and they are usually offered by most companies with little to no fees.
I always recommend giving your child control of the brokerage account, as it helps teach them important lessons in finance and investing, but if you don’t feel comfortable giving them control, I recommend that you hold a monthly strategy meetup, so that your child will still learn the valuable financial lessons.
Is it Right For You?
Roth IRAs are definitely the best option for your child if he/she is obtaining legally earned income. As you may know, you can only contribute legally earned income to a Roth IRA or regular Roth IRA, so if your child is not earning any legally earned income then your child will not be able to contribute any money to the account.