One of the most powerful financial gifts you can give your child isn’t a toy or a college fund contribution — it’s time in the market. The earlier investments start growing, the more compounding can work its magic over decades.
But when it comes to investing for kids, a lot of parents hit a wall. Can kids even have investment accounts? What type is best? How do you open one? This guide walks through the two main options — custodial brokerage accounts and Roth IRAs for kids — so you can make an informed choice for your family.
Why Start Investing for Your Child Now?
Time is the most valuable ingredient in any investment strategy. A child who has investments growing from age 5 has a massive advantage over someone who starts at 25.
Here’s a concrete example: $5,000 invested for a child at birth, growing at 7% annually, becomes about $75,000 by the time they turn 60. That same $5,000 invested at age 25 becomes only about $27,000 by age 60. Same money. Wildly different outcomes — just because of timing.
You don’t need a lot to make a meaningful difference. Small amounts, started early, can change a child’s financial future.
Option 1: Custodial Brokerage Account (UGMA/UTMA)
A custodial account — typically set up under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) — is the most flexible option for investing for kids.
How It Works
- You (the adult) open and manage the account as the custodian
- The assets legally belong to the child
- When the child reaches adulthood (18 or 21 depending on the state), the account transfers to them fully
You can invest in almost anything: stocks, bonds, ETFs, index funds — the same options available in a regular brokerage account.
Tax Considerations
Earnings in a custodial account are subject to the “kiddie tax.” The first ~$1,300 of investment income is tax-free, the next ~$1,300 is taxed at the child’s rate, and anything above that is taxed at the parents’ rate. For most families investing modest amounts, this isn’t a major issue.
Pros and Cons
Pros:
- No income requirements — any child can have one
- Very flexible — money can be used for anything (college, a car, travel, business)
- Easy to open at any major brokerage (Fidelity, Schwab, Vanguard)
Cons:
- No special tax advantages for growth
- When the child takes control at adulthood, they can spend it however they choose
- Counts as an asset in financial aid calculations (can reduce college aid)
A custodial account is a great fit if you want flexibility — you’re not locked into what the money must be used for.
Option 2: Roth IRA for Kids
A Roth IRA for a child works exactly like a Roth IRA for an adult — with one important catch: the child must have earned income.
The Earned Income Rule
A child can only contribute up to the amount they’ve actually earned that year, up to the annual IRA limit (currently $7,000). So if your child earns $800 doing lawn mowing or babysitting, they can contribute up to $800. The parent or grandparent can make the actual contribution on the child’s behalf — the money doesn’t have to come directly from the child’s pocket.
How It Works
- Contributions are made with after-tax money
- The money grows completely tax-free
- Withdrawals in retirement are tax-free
- Contributions (not earnings) can be withdrawn at any time, penalty-free
Pros and Cons
Pros:
- Extraordinary long-term tax advantage — decades of tax-free growth
- Retirement savings started in childhood can become truly life-changing wealth
- Teaches children the habit of saving for the future early
Cons:
- Requires earned income — not all children have this
- Money is intended for retirement — withdrawing earnings early comes with penalties
- Must be opened as a custodial Roth IRA (the parent manages it until adulthood)
A Roth IRA for kids is the better choice if your child has earned income and you want to set them up with tax-advantaged retirement savings as early as possible.
Which Should You Choose?
Here’s a quick comparison:
- Custodial Account: No income requirement, very flexible, best for college or general savings
- Roth IRA for Kids: Requires earned income, significant tax-free growth advantage, best for long-term retirement wealth
Many families use both: a custodial account for near-to-medium term flexibility, and a Roth IRA whenever the child earns income.
What to Invest In for a Child’s Account
Regardless of account type, the investment strategy for a child is simple: low-cost index funds.
A child investing for 20, 30, or 50+ years can afford to be almost entirely in stocks — the long time horizon absorbs the ups and downs. A total stock market index fund or S&P 500 index fund is an excellent, set-it-and-forget-it choice.
As the child approaches adulthood and may need the money, you can gradually shift to a more conservative mix. But in the early years, simplicity and growth are the goals.
How to Open a Custodial Account or Roth IRA for a Kid
For a custodial account: Fidelity, Schwab, and Vanguard all offer custodial accounts (UGMA/UTMA). Look for “custodial account” or “account for a minor” on their websites. You’ll need the child’s Social Security number.
For a custodial Roth IRA: Fidelity offers a custodial Roth IRA with no minimum balance. Schwab also offers them. You’ll need documentation of the child’s earned income (bank records, 1099-NEC, or payroll records).
For context on how to invest the money once the account is open, see our guide to index funds for families. And for a broader picture of family investing strategy, check out our post on how to start investing as a family.
Start Small, Start Today
You don’t need to contribute thousands of dollars to make a real difference. Even $25 or $50 a month in a custodial account, invested in a simple index fund from the time a child is born, will grow into a significant sum by adulthood.
The gift of time in the market is one of the most meaningful financial head starts you can give your child. For age-appropriate ways to involve your kids in money conversations, our guide on kids’ money skills by age is a great companion read.
Start where you are. Use what you have. The important thing is to begin.