Brokerage Account for Kids: A Comprehensive Guide

A brokerage account for kids can be a great way to teach them about money management and investing, but it's essential to understand the basics before getting started.

Most brokerage accounts for kids are custodial accounts, meaning a parent or guardian has control over the account until the child reaches the age of majority, which varies by state.

The minimum age to open a custodial brokerage account is typically 18, but some states allow minors as young as 13 or 14 to open an account with parental consent.

A custodial brokerage account can be a powerful tool for teaching kids about financial responsibility and investing in their future.

Choosing a firm for your child's brokerage account is a crucial decision. You'll want to research well-known firms like Charles Schwab, Fidelity, E*TRADE, Merrill Edge, and Vanguard, which offer accounts for minors.

Consider the firm's history and reputation, as well as the types of custodial accounts they offer and their tax implications. Different firms may have varying fees, investment options, and educational resources, so it's essential to shop around.

Here are some key factors to consider when choosing a firm:

Charles Schwab, Fidelity, E*TRADE, Merrill Edge, and Vanguard are well-known firms offering accounts for minors.

These firms have a good reputation and offer various types of custodial accounts with different tax implications, contribution limits, and restrictions.

Some newer companies, such as Greenlight, Loved Investing, and Stockpile, are specifically designed to help parents teach their kids about managing money and investing.

These companies offer custodial accounts with a small monthly fee for helping young and new investors set up an investment portfolio or simple investment strategies.

Fidelity offers an innovative account for kids between the ages of 13 and 17 called the Fidelity Youth Account, which can be opened by parents who already have a Fidelity brokerage account.

The Fidelity Youth Account allows kids to make trading decisions while their parents can monitor their activities.

Here are some companies that offer custodial brokerage accounts:

These companies offer a range of investment options, including exchange-traded funds (ETFs), mutual funds, and individual stocks.

Some of these companies, like Fidelity, offer no account fees, no account minimum, and commission-free stock trading.

Choosing a firm for your investment needs can be a daunting task, but weighing the pros and cons of different types of accounts can help you make an informed decision.

A brokerage account for kids can provide your child with valuable experience in investing their money, but it's essential to consider the potential for large losses.

Here are some key points to keep in mind:

Ultimately, it's crucial to consider your child's age and financial goals when deciding which type of account to choose.

You can open a brokerage account for your kid in minutes online using personal information for the adult account holder and the minor beneficiary.

You'll need to provide your Social Security number, contact information, and employment information when relevant.

Most custodial accounts can be opened online, making the process quick and easy.

You'll also need to provide information about an account to link to the custodial account for funding purposes.

This will typically involve providing the account number and routing number of an existing bank account.

You'll need to consider taxes when investing in a brokerage account for kids. Investment income from assets in custodial accounts can incur taxes at either the account holder's or the beneficiary's tax rate, depending on the account.

The first $1,100 of investment income is tax-exempt annually. This is a great benefit for kids with custodial accounts, as it means they won't have to pay taxes on the initial earnings.

If your child's investment income exceeds $1,100, it will be taxed at their tax rate. For most kids, this is 10%. However, if their income is above $2,200, it will be taxed at the parent's tax rate, also known as the Kiddie Tax.

This tax rate can be higher than the parents' tax rate, so it's essential to keep an eye on your child's investment income to avoid any unexpected tax bills.

Contribution limits can vary depending on the type of account. Unlike 529 accounts, custodial brokerage accounts have no contribution limits.

You can invest as much money as you'd like for your child's future in a custodial brokerage account. However, large gifts to any one recipient may face gift taxes if contributions exceed $15,000 in a year.

Custodial brokerage accounts offer more flexibility with contributions, but it's essential to consider the tax implications of large gifts.

As a parent, it's essential to understand the tax implications of investing for your teenager. Your child's investment income can be taxed differently depending on their age and the type of account they have.

The IRS defines investment income as the combination of interest, dividends, and capital gains. If your child receives only unearned income, they may not be required to file a tax return if their income is below $1,100. However, if their investment income exceeds $1,110, they must file a tax return, or you can choose to include their income on your own tax return.

Here are the tax rates for different levels of investment income:

As a parent, you can elect to include your child's investment income on your own tax return if their income is between $1,100 and $12,400. This can help simplify the tax process and avoid the need for your child to file a separate return.

It's also essential to note that the kiddie tax applies to children under 19 or 24 if they're a full-time student. This means that investment income over $1,100 and up to $2,200 will be taxed at your child's tax rate, and any income over $2,200 will be taxed at your tax rate.

Overall, understanding the tax implications of investing for your teenager can help you make informed decisions and avoid any potential tax pitfalls.

You can teach your child about investing by using a custodial account, which allows you to show them how investing works and monitor returns on their investments.

A custodial account provides the opportunity for kids to learn about different types of investment vehicles, constructing a balanced asset mix for a portfolio, and other more advanced investment topics.

You can choose investments for your child's account, or work with them to select the investments, providing a learning experience.

In some cases, you may be choosing the investments yourself and/or working with an advisor, while certain types of accounts, such as some 529 plans, may have more limited choices available.

You can talk to your kids about the types of products that interest them and invest in some of these stocks, which might be in addition to a more diversified portfolio of mutual funds and ETFs.

Custodial brokerage accounts function much like regular brokerage accounts, offering access to the same array of investment options, from ETFs and mutual funds to individual stocks.

You can opt for predesigned diversified mixes, like those you’d find in an Acorns portfolio, or work with your child to choose the investments, providing a learning experience.

Before your teens can begin investing, they should consider 7 steps, which include researching investment options, understanding fees and expenses, and setting financial goals.

You can use the account as a way to educate a child about compound interest and long-range financial planning, which are essential for achieving financial stability and security.

Opening a brokerage account for your child is a great way to introduce them to investing at a young age. This can be a lifelong benefit, teaching them the basics of investing and long-term financial planning.

You should consider the reason for opening the account, the objective for the money, and how it may affect your taxes. For example, under certain circumstances a custodial account can trigger unwanted tax consequences, a phenomenon known as the "kiddie tax."

Parents, guardians, friends and family members can all contribute to a child's custodial brokerage account, but only the person who set up the account (the custodian) can choose how that money is invested.

To get started, you'll need to provide personal and banking information and complete a series of forms online to open the account. Funding options for custodial accounts include cash, stocks, and mutual fund transfers.

Here are some key considerations to keep in mind when selecting a brokerage firm for your child's account:

As your child grows and becomes more involved in the investment process, you can teach them about different types of investment vehicles, constructing a balanced asset mix for a portfolio, and other more advanced investment topics.

The process of opening a custodial account involves providing personal and banking information and completing a series of forms online. This can be a straightforward process, but it's essential to carefully review the terms and conditions of the account before proceeding.