One option to teach teens how to invest early is to set up a custodial account for them.
Custodial Accounts for Teens
One advantage of custodial accounts is that they can teach kids to manage a portfolio from an early age.
Many investment banks and traditional banks offer custodial accounts for parents interested in saving for college or another expense that can benefit their kids.
Institutions that offer these accounts often create educational content too, which can help enterprising investors to learn more about the world of finance.
Allowing young investors some control over their investment portfolio can spur an interest in finance, and give them valuable experience in managing their finances.
Rules for Custodial Accounts (UGMA/UTMA accounts)
Custodial accounts may have specific guidelines determined by your bank, but there are some general rules that you should keep in mind:
- Custodial accounts are for kids—the money belongs to them as soon as you open the account, and custodians hand over the reins when a child reaches adulthood, which is typically between 18 and 21 years of age, depending on state law.
- The funds must benefit the child—Funds in a custodial account must go toward purchases for the child, and can’t be used for your own personal expenses.
- Beneficiaries can use the money as they see—Once a child gains control of the account, they can use the money for anything they want.
- Taxes—Generally speaking, you’ll need to pay taxes on the income accrued by a custodial account if the amount exceeds $1,050. However, many parents and guardians use these accounts linked to their children for the purpose of gifting them tax-exempt* money up to $15,000.
*For additional questions regarding Tax treatment, please consult a Tax professional
How Custodial Accounts Can Teach Young People About Money
Learning about investing can teach your teen important lessons about money and personal finance.
These lessons include how to use trading tools, and how to access or reference educational material pertaining to your assets.
Some companies offer personalized experiences, including guidance on investing basics, such as what purchasing a stock actually means, and the differences between a stock and a bond.
The Benefits of Starting Young
Starting to save and invest at a young age will help kids understand relatively complicated topics, like market fluctuations and earnings reports—things that many adults also struggle to grasp.
Custodial accounts can also help young investors understand the economic and financial basics of the market. For example, sitting down with your children to discuss the S&P 500 and discuss investment strategies can help build responsibility and trust, too.
One upside to starting early is the potential growth* a portfolio can experience over time, thanks to compound interest.