In a world where toddlers are tech-savvy and teens can learn just about anything YouTube, giving kids exposure to the stock market can help them learn about investing. Or you might be looking to take advantage of compounding effects and buy stocks for a minor that is under 18. Maybe your child has a little savings that could be put to work. While minors can not open their own brokerage account, youth or custodial accounts allow kids to effectively own stock while having responsible adults manage and invest money on their behalf.
It's now possible to invest in fractional shares, which is a smaller portion of a share. That means that you can buy stock with virtually any amount of money. Let's take a look at how to actually buy stock for a minor child.
At what age can you invest in stocks?
When it comes to minors, investing in the stock market can get a bit tricky. Typically you have to be the puppetmaster for their account until they come of age (18 or 21, depending on the state). Court orders can set up guardian accounts for incapacitated minors or adults.
Decide on an account type
While your little ones can't buy stocks on their own, you can open an investment account on their behalf. Most of these accounts are considered custodial because you have the right to make decisions. You can also choose different types of investment accounts that vary based on ownership — either your child is the owner or the beneficiary. This could have implications for financial aid qualification down the line. Your choice will depend on your goals and preferences. Some of the most common ones are:
Custodial Brokerage Accounts
Looking to give your child a head start in investing? Consider opening a custodial brokerage account. Custodial accounts act like financial fairy godparents, allowing adults to sprinkle their financial wisdom over assets meant for minors, usually those under 18 or 21, depending on the rulebook of the land. It's the clever strategy of gifting money or treasures to the young ones while maintaining a watchful eye on how those treasures are nurtured and grown until the junior VIP reaches a magic age.
Some of the best online brokers for custodial accounts include Fidelity, Schwab, or E*TRADE. Or, if you want to get a bit more creative, check out apps like Stockpile or Beanstox that allow you to gift fractional shares of stocks. Your child will thank you for the thoughtful and financially savvy gift in the future.
The main reason parents don't open up custodial accounts is that ownership belongs to the child and the assets count towards calculations for college financial aid. Students are supposed to contribute up to 20% of their own assets to pay for college, which means a lower amount of financial aid would be granted.
529 Accounts
These investment accounts offer tax advantages and two different savings options: prepaid tuition and college savings plans. With prepaid tuition plans, you can lock in current tuition rates at eligible colleges and universities. On the other hand, college savings plans allow you to invest in various options and use the funds for qualified educational expenses at any accredited school. Check out state-sponsored programs or brokers like Vanguard or TD Ameritrade to get started. Smart investing has never been easier!
For financial aid eligibility, 529 plans are considered parental assets and have less of an impact on the amount granted.
Roth IRA for working child
Got a hard-working kiddo? Help them secure their financial future by opening a Roth IRA account! A Roth IRA (individual retirement account) is like a financial time capsule – you stash away after-tax money, it grows like a money tree, and when you crack it open in retirement, the treasures inside (including any earnings) are tax-free! – basically, a retirement magic trick that Uncle Sam approves of.
Your child can stash away up to $6,000 a year (or their annual income, whichever is lower) and watch it grow tax-free. Think of it as a little nest egg for their golden years. Plus, they can use the funds to pay for qualified education expenses without any pesky taxes or penalties if they decide to return to school. For hands off investing, check out online robo-advisors like Betterment or Wealthfront. Who says being smart with managing money can't be fun?
Trust
If you want more control over the money, consider opening a living trust and buying stock in the trust's name (which can be done with a typical brokerage account). With a trust, you can lay down the law on when and how your kids can access the cash. Want them to graduate college first? Done. Want them to have a certain GPA? No problem. You can even throw in some conditions like avoiding certain behaviors or pursuing a certain career.
Youth account
Brokerages such as Fidelity have started to offer a new type of brokerage account for teens aged 13 to 17. Youth accounts are teen-owned brokerage accounts that offer a debit card, which is different from the custodial or joint accounts listed above. Your child owns and controls the account but under your supervision. Although parents or guardians can monitor the account activity, transactions, and alerts and initiate or close the account, they cannot transact in the account or withdraw money.
How to choose a stock for your child
There are many factors to consider when selecting a stock for your child, such as age, risk tolerance, investment horizon, interests, and goals. one of the best investment options for kids is the passive diversified choices.
Passive Diversified choices (index funds through mutual funds and exchange traded funds)
These funds track the performance of a broad market index, such as the S&P 500 or the Nasdaq 100. They are low-cost, low-maintenance funds that allow you to capture the average returns of the market and diversify your portfolio. And the best part? You can buy them through mutual funds or ETFs with just a few clicks. So sit back, relax, and let the market do its thing while you reap the benefits.
Consider dividend reinvestment plans (DRIPs)
DRIPs allow you to automatically reinvest the dividends you receive from a company into more shares of that same company. This feature means you can increase your ownership stake and benefit from compound growth over time! It's a great option for those who want to build their wealth effortlessly. And the best part? You can enroll in DRIPs with companies like Coca-Cola, Apple, or Disney!
How to gift stock to a child
You have a few options to gift stock to a child, depending on the type of account and the amount of stock you want to give. Some of the most common ways are:
- Transfer shares from your account to their youth account: If you want to pass on the family fortune to your little one, you can easily transfer your stock shares to their account. Just fill out a transfer form with your broker and provide the necessary details of both accounts. Keep in mind that this may come with a price tag in the form of taxes and account fees, so make sure to weigh the costs and benefits before making a move.
- Buy shares directly in their account: You can give your little one a head start on their Wall Street career by purchasing shares directly into their investment account. Log in as their account custodian, place a trade order with your broker, and voila! You'll be the coolest parent on the playground. Just be sure to fund it with your own moolah.
- Buy a stock gift card or certificate: If you want to give stock as a gift without opening or accessing an account for your child, you can buy a stock gift card or certificate from a company that specializes in this service. Check out companies like GiveAshare, Stockpile, or SparkGift, which specialize in stock gift cards and certificates. Choose from various individual stocks and send your kid a physical or digital gift card or certificate. They can then redeem it and claim the shares in their very own account. Easy peasy, lemon squeezy!
Harness the Power of Long Investing Timelines
Investing for your child is like planting a money tree that will grow and bear fruit for years to come. The earlier you start, the bigger the tree will be! So, don't delay and let the magic of compound interest start turning those small drops of today into the overflowing treasure chests of tomorrow! Your child will thank you for it in the future
Do you need to pay taxes on gifted stock?
Giving stock to a child? Well, you better brace yourself for a potential double whammy of taxes – gift tax and capital gains tax. But don't worry; with some clever planning, you can still pull off this gift without breaking the bank.
- Gift tax: Did you know you may have to pay a tax on your generosity? It's called gift tax, and it can apply when you give someone more than $16,000 worth of money or property per year(as of 2023). So, if you're feeling particularly generous and want to give your child (or anyone else) a gift worth more than that, just keep in mind that you may have to file a gift tax return. If you go over the annual limit, you're actually allowed a lifetime gift tax exemption of up to $12.92 million for 2023 –this amount changes annually.
- Capital gains tax: Capital gains tax is essentially a tax on your profits when you sell your stocks for more than what you paid for them. The longer you hold onto the stock, the lower the tax rate will be. If you've held onto the stock for more than a year, it's considered a “long-term” gain and taxed at a lower rate. If you've held onto the stock for less than a year, it's considered a “short-term” gain and taxed at the same rate as your regular income. So, the lesson here is to be patient when selling your stocks and hold onto them for as long as possible to avoid a higher tax bill.
A Different Way to Diversify
Investing for your child is like planting a garden – you want to diversify the seeds you sow to ensure a bountiful harvest. But just as you wouldn't plant tomatoes in rocky soil, you wouldn't want to invest in companies that don't align with your child's interests and passions. By nurturing their portfolio with stocks that reflect their dreams and aspirations, you not only help them grow their wealth, but also cultivate a love for learning about the industries they invest in. Now that's what I call a green thumb!
And why not make investing a family affair? Teach your kids about purchasing stocks and investing. Let them choose some of the stocks they want to own. Show them how to track the performance of their portfolio and make informed decisions. Not only will you be helping them grow their wealth, but you'll also be instilling good financial habits from an early age.
FAQ
Can I buy stocks for my grandkids?
You can purchase stocks for your grandkids, but before you start buying them for them, there are a few things to remember. First and foremost, talk to their parents. You don't want to be the grandparent who goes rogue with the grandkids' finances. Get their blessing and make sure you're on the same page about how much to invest, what type of investment account to use, and what stocks to buy. Given the potential financial aid eligibility implications, you'll want to plan it right.
Does a minor owning stock affect financial aid?
Yes, if the child owns stock in his or her name, it can have a significant impact on qualification for financial aid. A child will be expected to contribute up to 20% of their own assets to pay for college, decreasing the amount of potential aid available.