Investing for Kids: How to Start Building Wealth for Children

Account Options

Custodial Account (UGMA/UTMA)

The most flexible option for investing for a child. UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts allow you to invest in stocks, bonds, ETFs, and mutual funds on behalf of a minor. The adult custodian manages the account until the child reaches the age of majority (18 or 21, depending on the state), at which point control transfers to the child. The money can be used for anything — college, a car, a house, or starting a business. There are no contribution limits, and the accounts are subject to the kiddie tax rules: the first $1,250 of unearned income is tax-free, the next $1,250 is taxed at the child's rate, and anything above $2,500 is taxed at the parent's marginal rate. The main downside is that assets in a custodial account are assessed at 20% for financial aid purposes, reducing eligibility for need-based aid. Because the child gains control at 18 or 21, there is also a risk they may not use the money responsibly.

529 Plan

Best for education-specific savings. Contributions grow tax-free, and withdrawals for qualified education expenses (tuition, fees, room and board, books, computers) are also tax-free. Parents retain control of the account — the child cannot withdraw the money for non-education purposes. You can change the beneficiary to another family member if the original beneficiary does not need the funds. The SECURE 2.0 Act allows up to $35,000 in unused 529 funds to be rolled into a Roth IRA for the beneficiary. Financial aid treatment is favorable: 529 plans are assessed at 5.64% of assets (versus 20% for custodial accounts). Contribution limits vary by state but are typically $300,000-$500,000 per beneficiary. Many states offer a state income tax deduction for contributions. The main drawback is that withdrawals for non-education purposes are subject to income tax plus a 10% penalty on earnings. Everything about 529 plans →

Roth IRA for Kids

The most powerful long-term wealth-building account for children, but requires the child to have earned income. The child must have income from a job — babysitting, lawn mowing, snow shoveling, dog walking, or an after-school job all count. Contributions are limited to the child's earned income, up to $7,000 per year (2024 limit). Contributions can be withdrawn at any time tax-free and penalty-free. Earnings grow tax-free and can be withdrawn tax-free after age 59.5. For college, contributions can be withdrawn anytime, and earnings can be withdrawn penalty-free for qualified education expenses (though income tax applies). The benefits are extraordinary: a $3,000 contribution at age 15 growing at 7% becomes $44,000 by age 65. The child must have a parent or guardian open the custodial Roth IRA, and the child must have a Social Security number. Paying the child a reasonable wage for actual work performed is legal and common, but paying them for no work (no earned income) is not permitted.

Trust

Trusts offer the most control and flexibility but are the most expensive to set up and maintain. A trust can specify exactly how and when assets are distributed — for example, half at age 25, half at age 30, or only after graduating college or getting married. Trusts can hold any type of asset (stocks, real estate, business interests) and can be structured to minimize estate and gift taxes. The downsides are significant: legal and setup costs of $1,000-$3,000 or more, ongoing administrative costs, and the need to file a separate tax return for the trust (trust tax rates are highly compressed, with the top bracket hitting at roughly $14,000 of income). Trusts are best suited for substantial assets or situations where you need to control distributions due to concerns about the child's maturity or special needs.

Teaching Kids About Money

Ages 5-7: Basic Money Concepts

Use the three-jar system: saving, spending, and giving. Give your child a small allowance and teach them to divide it among the three jars. This builds the habit of allocating money intentionally from an early age. Use clear jars so they can see their savings growing visually. Keep lessons concrete and tied to things they care about — a toy they want to save for, a gift for a friend, or a treat for themselves.

Ages 8-12: Compound Interest and Investing Basics

Demonstrate compound interest with simple examples: "If you save $1 and it grows 10% each year, next year it is $1.10, and the year after that it is $1.21." Use compound interest calculators online to show how money grows over time. Tie allowance to chores to build the work-money connection. Use a stock picking game with fake money to teach how markets work. Open a custodial account and let them follow a few stocks they recognize — Disney, Apple, Nike — to build engagement. Compound interest calculator →

Ages 13-15: Part-Time Jobs and Roth IRAs

Encourage age-appropriate part-time work — babysitting, lawn care, tutoring, or a job at a local business. Earned income opens the door to a Roth IRA. Match their contributions to incentivize saving: for every dollar they put in, you add a dollar. Teach basic investing concepts like asset allocation, diversification, and the difference between stocks and bonds. Let them make small investment decisions in their custodial account and discuss the outcomes. This is the age to build the connection between work, saving, and investing.

Ages 16-18: Real-World Financial Decisions

Add the child as an authorized user on your credit card to build their credit history and teach responsible credit use. Introduce budgeting apps like YNAB or Mint. Discuss the true cost of college, student loans, and the return on investment of different education paths. Teach them about compound interest from the borrower's perspective — how credit card debt at 20% APR grows destructively. Review their custodial account and Roth IRA together, explaining the investment choices and performance. By age 18, they should understand budgeting, credit, investing, and the power of compounding.

Gifting Strategies

The annual gift tax exclusion for 2024 is $18,000 per person per recipient. This means you can give $18,000 to your child each year without filing a gift tax return or using any of your lifetime estate and gift tax exemption. Married couples can jointly give $36,000 per year per child. Payments made directly to educational institutions for tuition or to medical providers for medical expenses are unlimited and do not count against the annual exclusion. Grandparents can use a 529 plan with five-year averaging: a lump sum contribution of up to $90,000 (5 x $18,000) can be treated as if it were made over five years for gift tax purposes, allowing grandparents to front-load a 529 without gift tax consequences. Trusts can be structured to control distribution schedules, such as distributing funds only after the child reaches certain milestones. Understanding financial aid and account impact →

What is the best account for investing for a child?

The best account depends on your goal. For education savings, a 529 plan offers tax-free growth and the best financial aid treatment. For maximum flexibility, a custodial UGMA/UTMA account allows the money to be used for anything. For the most powerful long-term tax advantage, a Roth IRA for Kids requires earned income but offers tax-free growth forever. A trust provides the most control but is the most expensive. Many families use a combination: a 529 for education, a UGMA for flexible savings, and a Roth IRA if the child has earned income. This diversifies both the tax treatment and the purpose of the savings. Personal finance basics →

Can a minor have a Roth IRA?

Yes, a minor can have a Roth IRA if they have earned income from a job. The child must have a Social Security number and a parent or guardian must open the account as a custodial Roth IRA. The contribution limit is the lesser of the child's earned income or $7,000 (2024 limit). A 14-year-old who earns $2,000 from babysitting can contribute up to $2,000. Paying children for actual chores or work is allowed, but the work must be genuine and the pay must be reasonable. This is one of the most powerful wealth-building tools available — a few thousand dollars invested in a Roth IRA as a teenager can grow to hundreds of thousands of dollars tax-free by retirement.

How much can I give a child without paying gift tax?

In 2024, you can give up to $18,000 per person per recipient without triggering gift taxes or filing a gift tax return. Married couples can give $36,000 per year per child. Payments made directly to schools for tuition or to medical providers for medical expenses are unlimited and do not count toward the annual exclusion. Grandparents can use a 529 five-year averaging strategy to contribute up to $90,000 in a single year without gift tax consequences. Amounts above the annual exclusion reduce your lifetime estate and gift tax exemption, which is $13.61 million per person in 2024, so most people will never owe gift tax.

Should I invest for my child or pay off my own debt first?

Pay off high-interest debt first. Credit card debt at 18-25% APR is an emergency — paying it off is a guaranteed return that no investment can match. After high-interest debt is eliminated, build a 3-6 month emergency fund. Then, ensure you are saving at least 10-15% of your income for retirement. Once these are in place, investing for your child becomes a smart priority. Your child can take out loans for college; there are no loans for your retirement. As a general rule: your retirement savings come first, your emergency fund comes second, and then you can invest for your children. The best financial gift you can give your children is not being a burden on them in retirement.

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