Can I Open a Brokerage Account for My Child? | The Motley Fool (2024)

FAQs

Can I Open a Brokerage Account for My Child? | The Motley Fool? ›

Custodial account

A custodial brokerage account is one an adult opens for a minor. The child generally owns the investments or assets. But the adult usually controls the deposit, withdrawal and investment choices until the child reaches adulthood—usually 18 or 21 depending on your state's law.

How to invest $1,000 for a child? To invest $1,000 for a child's future, consider opening a brokerage account or a custodial account, or look into a 529 college savings plan with gifting options.

Name your adult child as your power of attorney in your estate plan and payable-on-death (transfer-on-death) beneficiary on your bank or brokerage accounts. This way they'll have access to those accounts if needed during your lifetime, while keeping your assets protected from their potential creditors.

Brokerage accounts don't offer all the services that a traditional bank offers. Brokerages might not offer additional products such as mortgages and other loans. Brokerages may not have weekend or evening hours.

To start investing in stocks on their own, your kid will need a brokerage account, and they must be at least 18 years old to open one. They can start earlier than this, but they'll need a parent or guardian to open a custodial account for them.

You'll be able to transfer existing shares of stock, mutual funds or other securities from your account to the custodial account, or buy specific securities directly within the custodial account. The child will take control of the account when they hit a certain age — typically 18 or 21, depending on the state.

Simple brokerage accounts are great for children. They have minimal fees and provide for a buy-and-hold strategy for long-term investing. In a brokerage account, stocks, bonds, mutual funds and ETFs can be purchased for a variety of investment options.

Since CDs typically earn higher annual percentage yields (APYs) than standard saving accounts, opening a CD can help your child's savings grow faster. You might also purchase a CD to give to your child or provide a head start on paying for a first car, wedding or other big goal.

Investing in index funds for your kids or teens is a savvy move. Index funds offer diversity without you needing a finance degree. They spread your investment across multiple companies, reducing the risk of putting all your cash in one place. Plus, they're known for steady growth over time.

Can your parents open a brokerage account for you? ›

Yes, you can start an investment account for your child. Many stock brokers offer custodial accounts, a type of investment account that a parent or guardian can open for a child. You can use a custodial account to make investments for your child, and when they turn 18, control of the account transfers to them.

Once ownership of the brokerage account is transferred over to your child—typically when he or she is 18 or 21, depending on the state—your child will typically be taxed at normal capital gains tax rates for withdrawals, based on his or her income bracket.

Child eligibility

For children aged 13 to 17, a parent/guardian with an existing Fidelity account may open this account on their behalf. Child must have the last four digits of their Social Security number, plus one form of ID. At age 18, account will be transitioned to a retail brokerage account for free.

If the value of your investments drops too far, you might struggle to repay the money you owe the brokerage. Should your account be sent to collections, it could damage your credit score. You can avoid this risk by opening a cash account, which doesn't involve borrowing money.

Many people fear putting money into a brokerage account for fear of losing it. And while it's true that a market downturn could cause your investments to lose value, you are protected against certain types of losses.

There's a big difference between having money at a bank and having money at a broker such as Charles Schwab, Vanguard, or Fidelity. Money at a broker isn't insured by the FDIC but it isn't like uninsured deposits at a bank. When you have money at a bank, you have a lender-borrower relationship with the bank.

A custodian is responsible for the safekeeping of your assets. This is in contrast to the broker who is primarily focused on accessing the financial markets on your behalf. This critical difference can be easily identified by the simple fact that custodians do not commingle client assets whereas brokers do.

A Junior Stocks and Shares ISA is a simple way to invest for a child's future. It's not an investment in its own right, it's a type of account.