Why Teaching Kids About Investing is Important:
Introducing your Child to Investing can seem daunting, but it can be a rewarding experience that sets them on a path to financial literacy and independence. By breaking down complex concepts into age-appropriate lessons and using practical, hands-on activities, parents can make investing both fun and educational.
With the duties she’s been taking on lately, she’s been earning a fair allowance. In addition, she seldom spends much money and always gets a small amount on her birthday. An investing account, perhaps?
Getting your child started in investing doesn’t have to be difficult, even if there are certain differences between the regulations for adults and children. Even if their earnings are modest, the experience could persuade them to begin saving for retirement at a young age, which could benefit them for the rest of their lives. This is how you teach your child the fundamentals of investing.
Select the type of account to open:
Under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA), children can open brokerage, savings, or checking accounts. All they need is an adult to sign in as the custodian of the account, which is probably you. This implies that until your child reaches adulthood—which is either 18 or 21 depending on your state—you will need to provide your approval for what your child does with the money. Once money or investments are placed in a UTMA, they can only be used for your child’s benefit because they legally belong to them. $100 cannot be deposited into your kid’s UTMA account and then taken out or transferred to another child.
A UTMA account can be set up similarly to any other account. You have two options: you may register online with a company like Vanguard, or you can walk into a bank or credit union and open one for your child by presenting your identity and completing some paperwork.
Additionally, your child may open a UTMA 529 savings account. The 529 is a tax-advantaged college savings plan, but it has limitations on how it may be used. Below is further information about it.
Teaching Philanthropy Alongside Investing:
Since your child is probably going to start with a modest amount of money, they might want to consider a micro-investing account in addition to a standard brokerage account. Stash or Stockpile are good options if you want to set up a custodial account. In fact, Stockpile integrates with BusyKid, an app that helps parents manage their children’s tasks and electronically pay their allowance.
To fund the brokerage account and collect dividends and other earnings, you might also need to create a checking or money market UTMA for your kid and link it to the brokerage account in addition to the investment account.
Your children are not eligible to open a standard or Roth individual retirement account unless they have received money from employment. (See also: 9 Crucial Personal Finance Lessons You Should Instill in Your Child Before They Leave)
Determine which investment vehicles to utilise:
Kids have access to the same financial options as adults after their account is set up, including exchange-traded funds, individual stocks, and mutual funds. The items people select are determined by their investment inclinations, initial capital, and level of activity.
A young person who wants to actively engage in the stock market and keeps track of one or more firms in the news could be interested in purchasing individual stocks. Seek out a brokerage company that offers cheap transaction costs and no minimum initial investment, or a little one. Although this is a practical and engaging approach to introduce children to the stock market, it’s important to convey to them that investing in funds is often a better long-term option than buying individual stocks.
A mutual fund like an S&P 500 index fund is a wonderful option if your youngster wants to invest in the market overall but doesn’t have any specific firms in mind. Excellent ones offer little costs, allowing your child to retain a larger portion of their investment. Regrettably, minimum investments are sometimes required for mutual funds. For example, in order to purchase shares in the S&P 500 index fund, which is frequently advised by Charles Schwab, you must first create a Schwab brokerage account and deposit $1,000.
Encouraging Questions and Curiosity About Money:
But there is a workaround for that: A $100 deposit is likewise sufficient to create a Schwab account; however, you will need to contribute an extra $100 per month until the account balance reaches $1,000. Additionally, your youngster may purchase exchange-traded funds (ETFs), which function similarly to mutual funds but typically have smaller minimum contributions.
Using one of the aforementioned micro-investing applications, which split one piece of stock or an ETF and sell the user a portion of it, is another method to start with a little initial commitment. These programmes, which categorise investments, can greatly simplify the initial setup process for young children. These services often demand a monthly subscription (Stash’s is $1) in return for making things this easy for you.
Even if your child has the option to invest in Treasury bonds or certificates of deposit, they probably wouldn’t find learning about investing particularly thrilling given the low interest rates of today.
Taxes, what about them:
Does your child’s gain from investments have to be taxed? Must they submit their own tax return? To both questions, the response is “It depends.” Don’t worry if your child’s investment income is less than $1,050; the IRS doesn’t need you to record this information. The parent may choose to file a separate tax return for the kid or report the child’s investment income on their own tax return if it is less than $12,000. You have to submit a tax return for your child if their value exceeds $12,000.
What will your child be paid? The tax rate on unearned income up to $2,100 varies based on the kind of income and is between 0% and 10%. After that, whether you file jointly or separately, your child’s unearned income will be taxed at your rate. Therefore, don’t think that moving all of your investment accounts to your children will save you a tonne of money on taxes; the IRS discovered this scam years ago.
If your child chooses to invest in a UTMA 529 plan, the funds are never subject to federal taxes (and usually not state taxes either) as long as they are used for approved educational costs like tuition and textbooks.
Will investing reduce their eligibility for financial help for college?
It’s crucial to remember that assets held in the child’s name are counted against them more heavily than assets held in the parents’ names when applying for financial help for college. Encourage your child to select more immediate objectives for their investing account unless you are certain that your family will not be eligible for financial help, which, outside of the 1 percent range, is typically not something you can be certain of in advance. A new Lego set, a week at a sleep-away camp, or the purchase of their first automobile might be their aim.
Once more, the situation is slightly altered when they place their savings in a 529 plan. Finaid officers see assets in a 529 account as parental assets, even if the kid is the account owner. This is fantastic news since, unlike student assets in a non-529 UTMA account, which qualify for 20% of financial aid eligibility, parental assets only make up around 5% of the total.
If your youngster does invest in their own name for college savings, let them use that money before you access any other education-related funds you may have, such as a 529 plan.