Yes, you can open an investment account for a child, but the account type depends on the child's age and your goals

Parents and guardians can open investment accounts in a child's name through several routes. The most common are custodial accounts (either UGMA or UTMA), which let you invest money on behalf of a minor and transfer it to them when they reach the age of majority. You can also open a 529 college savings plan if education funding is your goal, or a Roth IRA if your child has earned income. A few brokerages also offer teen investment accounts that let teenagers invest with parental oversight.

The account you choose affects who controls the money, what taxes apply, and when your child gains access to it. A custodial account gives you full control until your child reaches 18 or 21 (depending on your state and account type). A 529 plan restricts withdrawals to education expenses without penalty. A Roth IRA lets your child invest earnings tax-free but requires them to have actually earned money through work.

Key Takeaways

  • Custodial accounts (UGMA or UTMA) let you invest money for a child and hand it over when they turn 18 or 21, with no restrictions on how they spend it.
  • 529 plans are designed for education costs and avoid penalties only if the money goes toward tuition, room and board, or approved education expenses.
  • A Roth IRA requires your child to have earned income from a job, but lets them build retirement savings tax-free starting young.
  • Teen investment accounts offered by some brokerages let teenagers make trades with parental approval, teaching investing hands-on.
  • Custodial accounts and 529 plans affect financial aid calculations differently, so your choice matters if college funding is part of the picture.

Custodial Accounts: The Most Flexible Option

A custodial account is an investment account held in your child's name but managed by you as the custodian until they reach the age of majority. You can open one at most brokerages—Fidelity, Vanguard, Charles Schwab, and many others offer them. The account can hold stocks, bonds, mutual funds, ETFs, or other investments you choose.

There are two types: UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act). UTMA accounts are broader and exist in most states; they can hold real estate, artwork, and other property in addition to securities. UGMA is older and more limited but still available in some states. Both work the same way for stock and fund investing: you control the account, make all investment decisions, and the money passes to your child automatically when they reach the age set by your state (usually 18 or 21).

Once your child reaches that age, the account is theirs to use however they want—there are no restrictions. This is different from a 529 plan, where education-unrelated withdrawals trigger taxes and penalties. The tradeoff is that custodial accounts count as your child's assets on the FAFSA, which can reduce financial aid may be able to access more than parent-owned accounts do.

529 Plans: Designed for Education Costs

A 529 plan is a tax-advantaged savings account specifically for education expenses. You can open one at your state's plan administrator or through a brokerage. The money grows tax-free, and withdrawals for may have access to education expenses—tuition, fees, room and board, books, computers—are also tax-free.

You remain the account owner, not your child, which means you keep control of the money. Your child cannot access it without your permission. If your child does not go to college or receives a scholarship, you can transfer the account to another family member (a sibling, cousin, or even yourself for your own education). If you withdraw money for non-education purposes, you pay income tax on the earnings plus a 10% penalty, though some exceptions exist (like using up to $35,000 for student loan repayment).

529 plans also have a smaller impact on financial aid than custodial accounts do. Parent-owned 529 plans are assessed at up to 5.64% for FAFSA purposes, while custodial accounts are assessed at up to 20%. This matters if your child will be applying for need-based aid.

Roth IRAs for Working Teens

If your child has earned income from a job—whether a W-2 job, self-employment, or modeling—they can open a Roth IRA. You can contribute up to the amount they earned that year, up to the annual limit (which changes yearly but is typically around $7,000 for adults; teens follow the same limit). The money grows tax-free, and withdrawals in retirement are tax-free too.

The catch is that your child must have actual earned income to open one. Allowance, gifts, or investment returns do not count. If your child earns $2,000 from a summer job, you can contribute up to $2,000 to their Roth IRA that year. If they earn $500, you can contribute only $500.

A Roth IRA is powerful for young people because decades of tax-free growth can turn small contributions into substantial retirement savings. A 16-year-old who contributes $2,000 a year for five years and then stops will have a much larger retirement account at 65 than someone who starts at 25, even if the older person contributes more total dollars.

Teen Investment Accounts with Parental Controls

Some brokerages now offer accounts designed specifically for teenagers, where the teen can make investment decisions with parental oversight. Fidelity Youth Account, Charles Schwab Custodial Account, and a few others let your teenager research, propose, and execute trades while you monitor activity and set spending limits.

These accounts are educational tools as much as investment vehicles. They teach your teenager how markets work, how to research companies, and how to think about risk and diversification. You retain veto power and can block trades or set rules about what can be bought.

The tax and legal structure is the same as a custodial account—the money is in your child's name, and they gain full control at the age of majority. The difference is the hands-on learning component and the ability to let your teenager make real investment decisions with real money.

Tax Implications and How Earnings Are Taxed

Money you contribute to a custodial account or 529 plan is not tax-deductible—you are using after-tax dollars. However, the earnings (dividends, capital gains, interest) are taxed differently depending on the account type.

In a custodial account, your child pays tax on earnings. The first $1,300 or so of earnings per year (the exact amount changes annually) is tax-free. The next $1,300 is taxed at your child's rate, which is usually lower than yours. Earnings above that are taxed at your rate if your child is under 18 (or 24 if they are a full-time student and do not support themselves). This is called the "kiddie tax" rule.

In a 529 plan, earnings are tax-free as long as the money is used for may have access to education expenses. If you withdraw for other purposes, you pay income tax on the earnings portion plus a 10% penalty.

In a Roth IRA, contributions are not deductible, but earnings and withdrawals in retirement are tax-free. Your child pays no tax on the growth or the eventual withdrawal, which is why starting young is so powerful.

How to Actually Open an Account

To open a custodial account or teen investment account, go to a brokerage website (Fidelity, Vanguard, Charles Schwab, E*TRADE, or others) and look for "custodial account" or "minor account" in their account types. You will need your child's Social Security number, your own identification, and proof of address. The process takes 10 to 15 minutes online.

To open a 529 plan, visit your state's plan website or use a brokerage that offers 529s. You will need the same information. Some states offer direct-sold plans (you buy straight from the state) and advisor-sold plans (you work through a financial advisor). Direct-sold plans typically have lower fees.

To open a Roth IRA for your child, go to a brokerage and select "Roth IRA." You will need proof of your child's earned income for that year (a W-2, 1099, or tax return). The brokerage will verify the income before opening the account.

Once the account is open, you fund it by transferring money from your bank account. You can set up automatic monthly transfers or make lump-sum contributions whenever you want.

Frequently Asked Questions

Does opening an investment account for my child affect their Social Security benefits or government programs?

Custodial accounts and 529 plans do not affect Social Security. However, they can affect means-tested programs like Supplemental Security Income (SSI) or Medicaid if your child receives those. If your child is on SSI, check with their case worker before opening any account in their name, as asset limits are strict.

What happens to the account when my child turns 18?

In a custodial account, the money becomes theirs automatically—you lose control. They can withdraw it, spend it, or invest it however they want. In a 529 plan, you keep control unless you transfer it to them. In a Roth IRA, they can access contributions anytime, but earnings are locked until retirement age.

Can I change my mind and take the money back out of a custodial account?

No. Once money is in a custodial account, it belongs to your child legally. You cannot withdraw it for yourself. You can only use it for the child's benefit (education, medical care, living expenses). This is a legal protection for the child, not a restriction you can override.

Which account type is best for college savings?

A 529 plan is usually the best choice for college because earnings are tax-free for education expenses and it has less impact on financial aid than a custodial account. However, if you think your child might not go to college, a custodial account gives you more flexibility since the money can be used for anything once they turn 18.

Can I open multiple accounts for my child?

Yes. You can have a custodial account, a 529 plan, and a Roth IRA all at the same time. Many families do this to diversify their savings strategy—529 for education, custodial account for general wealth-building, and Roth IRA if the child has earned income. There are no legal limits on how many accounts you can open.