The Sum Up: How to Open a Brokerage Account for Your Kids

The image of a child with a stock portfolio might sound like something out of a movie, but it’s not as far-fetched as it sounds. In fact, there are good reasons to start your child out with a brokerage account at an early age.

A recent article in US News talked about the importance of teaching kids how to manage money and invest it while they’re still young. At Addition Financial we agree that financial education for kids is a must. Here are some highlights from the article to help you teach your kids about investing.

Inflation Poses a Problem for Retirement Saving

It wasn’t that long ago that anybody who worked throughout their adult lives could afford to retire at a reasonable age and a reasonable level of comfort. That’s no longer the case. The US News article quotes Mark Charnet, the founder and CEO of American Prosperity Group. He said this:

“Inflation over the last 100 years has devalued the dollar and will continue to do so, meaning children today will need a great many more dollars in the future to live on what we do today.”

Charnet’s assertion is backed up by figures from the United States Bureau of Labor Statistics, which says that it would take $10,000 in today’s dollars to buy the same goods you could have purchased for just $6,455 in 2000. Put another way, living expenses are approximately 55% higher today than they were 20 years ago.

Your children will need to save more money than you did to enjoy the same standard of living and the same retirement as you – and the earlier they start, the better off they will be.

The Benefits of Opening an Investment Account for Your Child

Before we get into the specifics of how and when to open an investment account for your child, let’s review some of the benefits of doing so:

• Opening an investment account for your child now will give them a head start in their adult lives.
• It improves their chances of enjoying financial stability later in life.
• It teaches them the virtue of patience and long-term thinking.
• It turns saving and investing into lifelong habits.
• It teaches them about important financial concepts such as compound interest and how the stock market works.

You want the best for your children, including a financially stable life and a comfortable retirement. By opening an investment account for your child now, you’ll be providing them with essential lessons and a financial foundation they can build on.

We also want to mention that many kids learn better with hands-on experience than they do from books or verbal instruction. Working with a real portfolio allows them to watch their money grow. As they get older, they can learn about asset allocation and risk management.

Investment Account Options for Kids

Minors under the age of 18 cannot open investment accounts on their own. If you want your child to learn about investing and start saving for the future, you will need to open an account on their behalf.

There are four types of accounts you can consider:

1. A 529 education account – The money in a 529 may be invested but it’s earmarked specifically for primary or secondary education. The downside is that, if your child chooses not to pursue higher education, they won’t be able to withdraw the money without penalties. However, 529 accounts may be passed down.
2. A minor Roth IRA – Roth IRAs offer tax-free compounding because you pay taxes before you contribute. These accounts require that the child have income – but it doesn’t need to be much. If your young teenager babysits or earns money as a camp counselor, you can contribute the amount they earn up to an annual maximum of $6,000.
3. A Uniform Transfer to Minors Account (UTMA) – With an UTMA, you will be the owner of the account until your child reaches majority age (18 or 21, depending on which state you live in) at which point it will transfer to them.
4. A custodial brokerage account – Using Acorns, an investment app, you can open a custodial account for your child. It works like an UTMA, and ownership will transfer to your child when they come of age.

If you already work with a financial advisor, you may want to consult them about the best option for your child.

Tips for Choosing Investments for Your Child’s Portfolio

Your child is more likely to be interested in learning about investments if they get to choose some of the companies in their portfolio. However, it’s a good idea to include a mix of accounts you choose with some of their choosing.

A good place to start is with exchanged-traded funds (ETFs) or mutual funds. These are lower-risk investments that provide a solid foundation for your child’s portfolio.

After that, take some time to sit with your child and talk about different companies. A child who’s interested in computers might like the idea of investing in Apple or Microsoft, for example. Remember, it’s not a bad idea for your child to choose a company whose stock loses money. They need to learn that stocks can go up or down.

We recommend that you start with a portfolio with 10 different stocks in it, with a good mix of ETFs, mutual funds and stocks. You should make sure to talk to your child about asset allocation. We suggest setting up a schedule that allows you to review the portfolio regularly. It’s valuable for kids to understand that they shouldn’t put too much of their money in any one investment.

As your child gets older, you can help them to expand their portfolio and consider new investment options. The more involved they are now, the more likely they are to continue investing as adults.

If you need help opening an investment account for yourself or your child, we’re here to help. Click here to read about Addition Financial’s relationship with CUNA Brokerage Services and schedule a no-cost, no-obligation meeting.