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The Fearless Advisor! Investing Your Young Children's Money - Here's How

Investing Your Young Children’s Money – Here’s How

By: Josh Duncan

Here are the best options for investing your children’s money—and a few strategies for empowering older kids and teens to make wise choices.

(The video is 4 1/2 minutes. Full transcript is below.)


Full Transcript of video

Hey friends, the Fearless Advisor here. Today I am going to discuss investing for your young children’s money.

Strategies for investing your young children’s money

Recently I have been asked by parents about investing strategies for their young children’s money. Let me tell you, I love this question! Teaching young people to save and invest money is a great investment in the future of our society. I will lay out a few strategies to help you start thinking about what may work for you and your children.

Knowing the purpose of the money to invest is the first step

First, as always, you must know the purpose of the money you are investing. If you are thinking about investing money that will be needed for an expense within the next three years, cash is a good choice. This ensures the amount saved will be there and that it will avoid market volatility. For longer-term needs, mutual funds or ETFs are a good option.

Incentivize your children to save with matching contributions, like a 401(k)!

The approach I use with my boys for their personal money is a custodial account. This is their money, but it allows me to help make decisions while they are minors. Their money is invested in a diversified mutual fund with the intent to grow. To incentivize them to save, I provide a 100% match on all of their contributions. Since all my kids are wired differently, the incentive only works for those who see value in the future.

The two types of custodial accounts are UGMA and UTMA

You may have heard of UGMA or UTMA accounts. These initials stands for the Uniform Gifts or Transfers to Minors Act. These accounts, which are the two types of custodial accounts, are for the benefit of the minor—and the minor takes control of the accounts at their age of majority, which is either 18 or 21 (depending on the state).

What taxes do I need to be aware of?

These accounts do count toward the minor’s assets when filing for college aid. So be careful how much you add to them. Also, unearned income generated from these accounts could be taxed if the income is high—if over $1,100 in 2021. The next $1,100 of unearned income is taxed at 10%. Above that, the tax rate is at the parent’s tax rate unless a kiddie tax return is filed.

Retirement accounts for employed children are a great opportunity!

Now, if your child is old enough to hold employment with earned income, they are eligible to contribute to retirement accounts such as a Traditional or Roth IRA. For 2021, they can contribute up to their total earnings or six thousand dollars, whichever is lower. What a great opportunity to start saving for the future! Some employers will even allow these young employees to participate in their 401(k)s.

Retirement accounts are not included for college financial aid.

The benefit of these accounts is possible income tax reduction with the Traditional IRA, either tax-deferred or tax-free growth, and that these accounts do not count as assets for college financial aid.

Using a brokerage account in the parent’s name will require a future gifting strategy.

Some parents take the approach of investing in a brokerage account in their name with plans to gift the account to their child later. The downside of this approach is that all unearned income will be taxed at the parent’s tax rate. Also, if the account grows beyond the annual gift exclusion amount, gifting will either count against the lifetime gifting exclusion or require the gifting to occur over multiple years. This just depends on the amount you either know or believe the account value will be at the time of gifting.

The are some simple strategies to get started.

These are some of the easiest ways to help your child invest their money. They may not fit for everyone but will give you an idea of what is available. My encouragement is to do your research and begin as soon as possible. Our children grow up so fast, and they cannot afford to wait. Growth takes time and the interest rates at the banks is next to zero. If you need help, reach out to our team or another financial planner you trust.

Reach out to us at F5 Financial with questions!

If you need assistance or have questions about investing for your children, we are available and would be happy to support your family. You can request a consultation.Thanks for joining us!


Photo credit: Michael Longmire on

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