Investing With Kids

Parents have good reasons to invest for their kids. Investing on a child's behalf, for their education or even retirement, could help them attain a measure of financial security and independence at a much younger age. Getting started early can also help them take advantage of compound growth potential.

But investing as a shared activity with kids can also be worthwhile. An experienced mentor can help give young investors access to real-life financial experience before they venture out on their own.

What follow are some of the common accounts parents, guardians, grandparents, and beyond can use to invest on their kids' behalf, as well as choices for investing alongside them. Some of these accounts are available from birth, while others will have to wait until the kids are older. Some can be used only for specific purposes, while others can be used for any purpose at all. All of them offer opportunities to save or invest.

Some saving and investment accounts can be opened in the year a child is born, generally with the child designated as the beneficiary and often with potential tax benefits. All of these accounts permit contributions from anyone—parents, grandparents, extended family, friends, etc.

There are a variety of saving and investing accounts for future education expenses.

A 529 account is a tax-advantaged education savings plan intended principally for college savings. The adult manages the account in the child's name, and there are no age limits. Anyone can contribute to the account, but contributions are made on an after-tax basis, so they aren't tax-deductible.

However, investments in the account can grow on a tax-deferred basis, and money can be withdrawn tax-free when used for qualified expenses like tuition, books, and supplies. That said, 529 plans aren't limited to college tuition and expenses. For example, up to $20,000 a year from a 529 plan can be used to pay for eligible elementary, middle, and high school expenses, including public, religious, and private school tuition. Additionally, the beneficiary of a 529 account can pay off up to $10,000 in student loans (the lifetime limit) without incurring any penalties or tax consequences.

If 529 funds are used for a non-qualified purpose, only the earnings portion of the withdrawal is subject to state and federal income tax and a 10% penalty. Note that state tax treatment may vary. Check with your tax advisor for rules on your state tax treatment.

There's no annual contribution limit, but each state sets their own lifetime limit per beneficiary that restricts new contributions once the account reaches a certain value (in the range of $400,000 to $550,000).

If your child ends up not needing the 529 funds for higher education expenses, you can change the beneficiary of the 529 plan to another qualified family member—including yourself. The IRS broadly defines the term family member to include everyone from the original beneficiary's siblings and parents to stepsiblings and in-laws. You can also potentially roll up to $35,000 of leftover funds into a Roth IRA for the beneficiary if certain requirements are met. To qualify, the beneficiary must have earned income up to the amount converted, the 529 account must have been open for at least 15 years, and rollovers count toward the annual Roth IRA contribution limits. Always review the most current IRS rules before making beneficiary changes.

Before investing, be sure to consider whether the your home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.

A Coverdell Education Savings Account (ESA) is a different type of account offering tax-advantaged savings that you can use to pay educational expenses from kindergarten through college. Again, the parent manages the account on behalf of the child.

Like with a 529, investments can grow on a tax-deferred basis, and money withdrawn for qualifying educational expenses—tuition, books, supplies, uniforms, room and board, computer equipment, and internet service—is spared taxation. Tax-free withdrawals apply not only to college expenses, but also elementary and secondary education expenses—regardless of whether the school is public or private, secular or religious.

If the distribution exceeds the beneficiary's qualified expenses, a portion of the earnings could be taxable to the beneficiary. If you withdraw funds for non-qualified expenses, any untaxed earnings are taxable to the beneficiary, along with a 10% federal penalty.

ESAs differ from 529s in a few significant ways. First, ESAs may have more investment choices than a typical 529. They also aren't subject to a $20,000 tax-free withdrawal cap for qualified expenses to an elementary or secondary public, private, or religious school.

However, they do come with income eligibility limits and a relatively low limit on contributions. The annual maximum is $2,000 per beneficiary—or less for higher earners—which means if you (as a parent) contribute all $2,000, grandparents and other individuals aren't allowed to make additional contributions to the account during that year.

The good news is your child can be the beneficiary of both a 529 plan and an ESA, and you can contribute to both accounts in the same year.

If your child decides not to attend college, or there is money left in the ESA after he or she graduates, you can change the beneficiary. However, an ESA must be distributed within 30 days after the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary.

If you want to give a gift of money to a child and also introduce them to the world of investing, a custodial account can be a good choice. Custodial accounts—also known as UGMA or UTMA accounts, after the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act that created them—are investment accounts typically established for a child and managed by a custodian, such as a parent. However, when the child reaches age 18, 21, or up to age 25 (depending on the state of residence), legal control of the account automatically becomes theirs.

Anyone—parents, grandparents, other relatives, friends, and even the kids themselves—can make unlimited contributions to a custodial account once it's open, and the funds can be invested just like in a standard brokerage account. However, a person can't contribute more than $19,000 per year ($38,000 for a married couple) in 2026 without potentially triggering gift tax reporting requirements. Money and assets deposited into a custodial account immediately and irrevocably become the property of the child. In other words, you can't take the assets back or give the assets to someone else.

Be aware that investment income in a custodial account is subject to the kiddie tax. In short, this means that below a certain level, investment income is taxed at the child's income tax rate. If the account earns more than that, the income will be taxed at the parent's tax rate.

These accounts may not be the best option for saving for college, as assets in custodial accounts count heavily against a child's eligibility for financial aid.

You could almost think of a Trump Account as a cross between a traditional individual retirement account (IRA) and a 529 savings account. Such accounts could be an option for teaching kids about investing or even helping them save for retirement. (Wealthier families could also use them as part of their wealth-transfer strategy by moving some of their taxable estate over to a child beneficiary's account.)

In brief, these accounts will initially be eligible for after-tax contributions of up to $5,000 a year until the year the beneficiary reaches age 18. (Initially, eligible children born between January 1, 2025, and December 31, 2028, may also be able to secure a one-time deposit of $1,000 from the U.S. government.)

Like with an IRA, any earnings can potentially grow tax-free, and eligible withdrawals will generally be taxed at the beneficiary's income tax rate. However, withdrawals are generally prohibited until the beneficiary reaches age 18, at which point the account will need to be converted to an IRA.

Like with a 529, the child doesn't need to have an income to accept contributions, and nearly anyone can contribute to their account. But there's no requirement that the proceeds be used for education expenses—or any other purpose.

Funds held in these accounts can be invested in eligible mutual funds or exchange-traded funds (ETFs) that track a major index.

As noted, these accounts will need to be converted to IRAs once the child reaches age 18, which will make them subject to IRA tax rules. Since a Trump Account could potentially hold two types of savings—after-tax contributions and untaxed earnings from the investments—taxes on withdrawals will depend on what portion of the account is being withdrawn:

• After-tax amounts (i.e., contributions) that are withdrawn will be tax free, since the taxes have already been paid on these assets.
• Pre-tax amounts (i.e., any tax-free contributions, appreciation, or earnings) will generally be taxed at the beneficiary's ordinary income tax rate.

In addition, it's important to understand that early withdrawals before age 59½ may be subject to a 10% penalty.

These accounts are available only later in childhood, either because of age limits or a requirement that the child be earning taxable income before any contributions can be made.

A youth investing account is one that you and/or your teen (generally age 13-17) can open—and potentially manage—together. Such accounts could work for families who want to give their teens a real-world, hands-on investing experience.

Depending on the brokerage, teens can propose or even make trades in the account, while parental access ranges from the ability to monitor and approve account activity all the way through to the ability to make trades and withdrawals themselves. In general, these accounts are limited to traditional assets such as stocks, ETFs, mutual funds, and fixed income assets like bonds. (More sophisticated products, like options and margin loans, are off limits.)

Such accounts generally don't have account minimums or charge commissions. They may also come with educational tools aimed at young investors. Once the teen hits age 18, they can convert their account to a standard brokerage account.

If a child works and has earned income, he or she may be eligible for a custodial IRA. This account is also managed by a parent or guardian for the benefit of the child. The barriers to entry are pretty low: These accounts generally have no minimum balance requirements, and no account-opening or maintenance fees. (Other account fees, fund expenses, and brokerage commissions may apply.)

As with any IRA, the owner of the account (the minor) must have earned income to make contributions to the account. The funds invested may qualify for special tax treatment, which will differ depending on whether you open a traditional IRA or a Roth IRA. Custodial Roth IRAs may be particularly appealing as young workers tend to have lower tax rates, so they could start to build wealth with the potential for tax-free growth.

Annual contributions can't exceed either the child's earned income or the annual contribution limit ($7,500 in 2026), whichever is lower. For example, if your kid makes $3,000 as a lifeguard or babysitting over the summer and doesn't make any other money during the year, they could contribute just $3,000 to their account.

Investing is a lifelong journey with many possible paths to follow. The key is to get started as soon as possible, with whatever resources your financial situation might permit. Opening and funding accounts for the various milestones in a child's life before they reach them can help ease their way, while investing alongside them can help instill the values and discipline they'll need when they are old enough to take control of their personal finances.

Investing early can help your family take advantage of the time available in such abundance to the young and get a head start on saving for the child's future.