How to open a brokerage account for your children

You probably already know the importance of investing for retirement and you want to pass this knowledge on to your children.

Without the growth provided by long-term investing, it would be nearly impossible for you to grow the nest egg you need to be financially independent in your later years. And as difficult as it may be for investors to contribute to a retirement account, your children face an even steeper path to financial independence than you.

“Inflation over the past 100 years has devalued the dollar and will continue to do so, which means that today’s children will need many more dollars in the future to live on what we do today. “, says Mark Charnet, founder and CEO of American Prosperity. Group in Pompton Plains, New Jersey. For example, it takes $10,000 today to buy the same amount of goods that you could have bought for $5,950 in 2000, according to the US Bureau of Labor Statistics.

The best way to combat the impact of inflation is to invest. The sooner you start investing, the better off you will be. Here are some benefits of opening a brokerage account for your children and steps to get them started on the right foot:

— Why should you open a brokerage account for your children.

— Types of brokerage accounts for your children.

— How to choose a brokerage firm.

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Why should you open a brokerage account for your children

“Often referred to as turbocharge or super-boost, the sooner you start investing, the more time exponential capitalization growth has to occur,” says Thomas O’Connor, senior wealth management advisor at Keel Point in Huntsville, Alabama. . The corollary of this is that the sooner you start investing, the less you will actually need to invest to achieve a given goal.

Opening a brokerage account for your child could give them a head start in life. In addition to helping provide your children with future financial stability, investing on behalf of your children can also provide other benefits.

“In a world of instant gratification, investing goes against the grain,” says O’Connor. “Investing, by nature, is long-term and requires patience and other principles to achieve desired results.”

Investing for children and including them in the process can help them learn valuable skills, such as delayed gratification, the habit of saving and the benefits of compounding, he says.

“Involving your kids in the investment process from the start will allow them to learn by doing,” says Billy Bruns, managing director and partner at MAI Capital Management LLC in Cincinnati. “Teaching them the steps of choosing an asset allocation, diversifying investments and rebalancing over time will be very helpful to them as they make these decisions with larger and larger balances as they get older. “

Types of brokerage accounts for your children

“There are myriad options when investing for your children,” says Charnet. In fact, the options are largely the same as those you have when investing for yourself.

You can open the following types of brokerage accounts for your children:

— 529 university savings account

—Roth IRA

– Deposit account

— Traditional brokerage account in your name

529 college savings account. If you are investing for a child’s education, you can use a state-specific 529 account. These allow you to make after-tax contributions to an investment account that can then be used tax-free for qualifying elementary or high school expenses.

“The main disadvantage of a 529 plan is that the funds must be used for educational purposes in the future, and your child can always choose not to pursue higher education,” says Charnet. “You can transfer the account from one child to another for educational purposes, or face penalties and taxes if you use the funds for non-educational purposes.”

The ability to pass on the 529s makes them “exceptional legacy accounts because they can be passed on indefinitely with tax-free benefits for educational purposes,” O’Connor says.

Roth IRA. If you want to give your kids a head start in retirement, you can open a minor Roth IRA. “If you think compounding is awesome, tax-free compounding is on another level,” says O’Connor. There’s a catch – to use a minor Roth IRA, your child must have earned income, and you can only contribute as much as they earn in the year up to the annual maximum, which is $6,000 for 2022. So if he made $1,000 working as a camp counselor, you could put $1,000 in their Roth IRA.

Contributions can be withdrawn tax-free, although there is income tax and a 10% penalty if your child withdraws investment income before age 59½. However, there are exceptions: the IRS will allow your child to withdraw up to $10,000 of income for the purchase of a first home without paying a penalty, and if the account has been funded for more than five years, this income is also exempt from tax. .

Deposit account. For a general purpose investment account for your child, consider a depository account, such as a Uniform Minors Transfer Account, or a UTMA Account, or Uniform Gifts to Minors, or a UGMA Account.

“Similar to an individual brokerage account, you may be subject to taxes each year based on dividends and capital gains,” says O’Connor. “However, with a UTMA, taxes are at the child’s tax rate, which is generally lower than that of the parents.” Investment income over $2,300 will be taxed at the parent’s rate.

Custodial accounts are in the child’s name, but you as the parent retain control of investments and withdrawals until the child reaches the age of majority in your state, which is usually between 18 and 25 years old. the child automatically takes control of the account, which is a downside we point out to clients from a control perspective,” says Daniel Milan, managing partner of Cornerstone Financial Services LLC in Southfield, Michigan.

It’s also possible that your child could sue you for mishandling their UTMA account, Charnet says.

Traditional brokerage account in your name. If this concerns you, a better option may be to open a brokerage account in your name and allocate the funds to your child. You’ll have to pay taxes at your tax rates, but you’ll also retain full control of the account and face fewer restrictions than with any of the previously listed options.

Once you decide your child is mature enough to take over the account, you can rename it to the child’s name, Milan says.

“Children can also be named successors in the event of the parent’s incapacity or death, and the account can be transferred to the child if the assets are placed in trust or by will by the parents,” says Ms. Charnet.

How to choose a brokerage firm

“Once you have decided on the type of account that best suits your child’s situation, you then need to decide which financial company you want to open the account with,” says Bruns.

A great keeper can be a good choice. Companies such as Fidelity, Charles Schwab, or Vanguard can help you with any account you choose. Google “start a Fidelity brokerage account” and you’ll find a link to the company’s website, where you can see the different types of accounts. From there, just follow the steps to open a new account.

Depending on the type of account, you may need to provide your child’s social security number as well as their date of birth and contact information, in addition to your own.

If you need help, you can also work with a financial advisor, who can walk you through the steps.

“Once the account is open, you can fund it by check or by linking a bank account to it,” says Bruns. Now is the time to start investing.

You can get a little more buy-in to the process by investing in businesses your child likes, O’Connor says. But while this strategy can boost engagement, it’s also important to teach your child about diversification, or not putting all your eggs in one basket. You can do this by adding broadly diversified exchange-traded funds or ETFs and mutual funds that will give you access to a basket of stocks with every stock you buy.

“With the funds, you benefit from ease of use, professional management, stated investment objectives, low minimum investment requirements, low operating costs and expenses, and the possibility to transfer your funds between other funds in the same family with no additional fees or expenses,” says Charnet. “Different funds have different investment objectives, so read and compare.” A fund’s investment objective can be found on its profile page.

“Any reputable brokerage firm will allow you to open more than one account, which means you should have one for each child,” adds Charnet.

As your child grows, you can involve him in investment decisions and management. “Teaching children to invest and to do it together is a valuable gift and experience that parents can provide, instilling important life and financial principles at an early age that sets them up for future success,” says O’Connor. .

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How to open a brokerage account for your children originally appeared on usnews.com

Update 04/01/22: This story was published at an earlier date and has been updated with new information.