How to Open a Child Investment Account
A child investment account can be as simple as an investment account opened in a child's name, or it could be for a specific purpose such as college savings or other education expenses. Some investment accounts for children are called custodial accounts. Child investment accounts can also come in the form of a trust fund. There are different tax implications for the different types of child investment accounts.
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Instructions
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Decide on your objectives. If you are saving for college or other education expenses, there are certain types of accounts that work best. On the other hand, if you are trying to save on taxes, opening an investment account in your child's name with investment income up to certain limits will result in lower taxes.
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Research your options. There are different kinds of investment accounts for children, and each financial institution has its offerings. A good place to start is your financial institution. Also, online discount brokerage firms have investment account options for children. Sharebuilder, for example, has custodial accounts and Educations Savings Accounts (ESAs). Charles Schwab has custodial IRAs, custodial accounts, ESAs and 529 accounts.
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If investing for college or other education expenses, consider a 529 account or an ESA. 529 and ESA accounts have different contribution limits and tax implications. In most cases, withdrawals can be made for approved education expenses tax free. See Resources below for details on education investment accounts.
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Consider a custodial account or trust fund. Custodial accounts are set up by an adult in the name of the child with the child's social security number and is controlled by the adult until the child is 18 or 21, depending on state laws. Custodial accounts are either UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfers to Minor's Act). The former usually starts with a cash gift; the latter starts with a transfer of stocks from the adult. Custodial accounts are not tax-deferred, and they are usually taxed at a lower rate for the child up to $1,800 in income--when the higher tax rate at the parent's level kicks in. This is called a kiddie tax.
If you decide on a trust fund, this is an investment account opened in trust for the child in which the adult decides at what age the child can have access to it. You can manage the fund yourself or give it to a fund manager. -
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Open the account. After completing your research and deciding what type and at what financial institution the account will be held, open it, link it to a checking account and fund it. If you intend on making periodic contributions instead of one annual one, make it automatic.
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