Loved.com - Money for the Next Generation

Brokerage account for kids

By Nick Nolan January 22, 2021

Brokerage account for kids

Brokerage account for kids

There is an old investing adage: "Time in the market beats timing the market."

Our team agrees. The best time-tested advice for saving and investing is to start early and be consistent. There will always be ups and downs. The sooner you start investing for the future, the better your chances are of growing your investments.

Waiting for the perfect timing to invest isn't a great strategy. You will likely be waiting too long and miss out on potential growth. Today, we'll explain the ins and outs of opening and growing a brokerage account for children, and why today is the best time to start saving for their future.

What is a brokerage account?

A brokerage account is an account for investors to buy and sell stocks, bonds, and ETFs. A brokerage account is similar to an individual retirement account (IRA) or Roth-IRA, but a brokerage account is taxable.

You own the money in your brokerage account and can make deposits and withdrawals as needed. The broker acts as a middleman between you and the investments you want to purchase. The broker can be online only, like Loved, or a human financial advisor that you pay to manage your funds.

An online brokerage account makes buying investing in your favorite companies easy. You can buy stocks directly from a company, but if you sign up for Target's direct stock purchase plan, you'll only have the option to buy Target stock. A brokerage account lets you quickly purchase stocks and bonds from thousands of different companies.

What is a brokerage account for kids?

Most brokerages require you to be over 18 to open an account, limiting kids and teenagers who want to invest their money. If your kids are willing to invest their money for a few years, they can enjoy some nice returns. That can help if they're saving for their first car, a downpayment on a house, or college expenses.

One solution for the age restrictions is to open a custodial account. This type of brokerage account allows the child to maintain ownership of the funds while an adult manages the account. This way, the kids will retain ownership of their money, and any capital gains tax liabilities are taxed in the child's name—not the parent's. We'll share more on taxes a bit further down.

A custodial account allow you to buy stocks for kids, and gives kids the feeling of ownership and responsibility, while providing the parents or guardians the authority to make wise investing decisions. And when the child reaches the age of majority, 18 or 21 depending on your state, they take full ownership of the account assets and continue saving and investing into the future.

You might also hear a custodial account called a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts. At Loved, we use UTMAs because they offer more flexible investment options than a UGMA, providing you with the most benefits.

Making deposits and withdrawals

Custodial accounts are designed to be easy and flexible. You can get set up in just a few minutes and start with as little as $1.

Loved also makes it easy to set up recurring investments. You can set a recurring deposit into your investment account on a weekly, bi-weekly, or monthly basis. Recurring investments make it easy for your investments to grow over time.

There are IRS regulations for making a withdrawal from your custodial account. Because the money in the account belongs to the child, it needs to be used for their own benefit. That can include educational expenses, a school trip, or other non-essentials that benefit the child.

Fees, taxes, and account minimums

Most retirement accounts and financial management tools have fees, taxes, and limitations. Some retirement accounts require a minimum deposit of $5,000 or more. Loved offers a custodial account with a minimum investment of just $1 at a time—perfect for part of your child's weekly allowance, or lemonade stand earnings. You can use your money to buy partial stocks, so you can spend $5 and buy a small piece of Disney stock without needing $170 (Jan. 2021 stock price).

You also don't need to worry about losing your gains to monthly fees. Investing in your custodial account won't cost you a thing; there's no monthly subscription, brokerage fees, or trade commissions.

Custodial accounts let you focus on what matters: saving money for your kid's future.

When using a UTMA, an adult can gift up to $15,000 ($30,000 per married couple) without triggering a gift tax. This is a great way to distribute wealth generationally, to your kids, grandkids, and extended family. It's also important to consider the benefits of a UTMA for the child.

Since kids don't make a lot of money, they won't owe too much taxes. The IRS provides kids with a tax-free threshold on their first $2,200 of unearned annual income after which they will be taxed at Trust and Estate tax thresholds. This tax-free threshold provides an opportunity to let your kids hold assets while avoiding higher taxes. More information on the taxation of kids' unearned income is available at the IRS.

Opening your account

If you're ready to open a brokerage account for your children, the process is easy. We designed the Loved app to be user-friendly, even if you're brand new to investing on your own.

Once you have the Loved App from the Apple App Store or Google Play Store, you can follow the steps to open and fund your new account. You will need an adult (18+) to be the manager of the brokerage account. You'll need your and their legal name, date of birth, and social security number so that we can verify your identity and protect their account for the future.

To give your kids access, you can open up the settings for the respective account you want to grant access to and choose Create Login. This will allow them to access their account but limit them from transferring any money from your bank or placing any trades.

Throughout the process, ensure you're keeping your kids involved. This is an important aspect in teaching them about investing and setting them up for future success. As your kids continue to learn about money, they will learn financial responsibility and be empowered to make great decisions.

Get started here to open a new brokerage account with Loved.

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