Letting your kids invest their own money is a way to teach them about financial responsibility firsthand. As their investments grow, kids will learn about interest and compounding, see the rewards of disciplined saving and earn real money for college and other future expenses. Because minors can’t legally open a bank or investing account, you’ll have to set one up on their behalf. One of the most common ways for kids to invest money is through the Uniform Transfers to Minors Act (UTMA). UTMA accounts legally belong to the minor, but are managed by a custodian until the child reaches the age of 18 or 21, depending on state law.
Things You'll Need
- Social Security Number
- Child’s Social Security Number
Obtain a Social Security Number for your child if she doesn't already have one. This is necessary to open the account. Complete an application online at Socialsecurity.gov and mail it or drop it off at your local Social Security office.
Select a custodian who will manage the UTMA until your child reaches legal age. This can be yourself or another parent or guardian. Make sure the custodian is someone trustworthy, as she will have the authority to withdraw funds on behalf of your child.
Fill out an application at a brokerage firm or at an online brokerage website. Online brokers are convenient because you can often make deposits electronically.
Decide how much money you would like to invest. You and your relatives can each make tax-free deposits of up to $12,000 annually (while contributions are tax-free, however, earnings are not). If your kid wants to invest his own money, develop a plan. Will you keep part of his allowance each month for investment? Will he transfer money to you, which you will then deposit into the UTMA?
Select your investments and purchase them through your broker. You can choose mutual funds, individual stocks or a mix of the two. However, consider buying at least one stock from an individual company. Individual stocks will be easier for your kid to understand and are more likely to pique her interest. Encourage her to invest a small amount in a company she admires, such as her favorite food, toy or clothing company.
Share the UTMA account statements with your child.