Investment options for kids are extremely limited but they do exist.
When I was a teenager, I was encouraged to put my savings into a Certificate of Deposit (CD.) CDs were all the rage back then. “PUT A COUPLE HUNDRED INTO CD,” they said. “YOU CAN EARN AN AMAZING 1-3%,” they said…
If you don’t know, a CD is similar to a savings account. Except, unlike a savings account, you agree to let the banker hold your money for a certain amount of time. Your money is insured, so it is virtually risk-free.
In the 2000s, I had several CD’s. I bought some with my savings and my family bought some for me. I thought I was going to GET RICH QUICK!
Here’s the funny thing though…
Inflation itself can rise more than a CD’s interest rate. The average inflation rate is 3%. According to The Balance, in 2007 (my CD investment year) inflation was 4.1%! So, by the time I cashed out on my CD’s my money was technically worth less than when I originally “invested” in the CD.
If only I could go back in time… But I can’t. So let’s cut the chase so you can make better decisions for your kids (or for yourself if you are the minor reading this!)
OPTION 1: CUSTODIAL INDIVIDUAL RETIREMENT ACCOUNT (IRA)
IRAs are tax-advantaged accounts that are designed to help you save for retirement. A lot of people think that they are only for adults, but that is not so. With your child’s social security number, you can open on what is called a “Custodial IRA.”
You can choose between a Traditional IRA or a Roth IRA. There are some rules to open these accounts though.
To qualify for a Traditional or Roth IRA, the minor must have an earned income. If you have a teenager who is old enough to work locally, let them get a job and contribute their earnings.
But what if your child hasn’t reached the legal working age yet? That’s okay too. If you run a business, you can hire your kid to work for you. There are literally babies who have IRAs. I’ve heard of one person who took pictures of her baby and hired her as her business’s model and started her IRA.
If you and your child invest in a custodial IRA, there is going to be major long-term advantages. IRAs have compounded interest, meaning that the interest earned is reinvested into your account. So basically, the interest earns interest.
Some differences between a custodial Traditional vs. Roth IRA:
CUSTODIAL TRADITIONAL IRA
A custodial Traditional IRA can be funded up to $5,500 a year. The money contributed can be used as a tax deduction from their earned income.
However, keep in mind that minors don’t have to file taxes unless they make above a certain amount – which changes from time to time so check the current filing requirements.
Earnings from a custodial Traditional IRA will grow tax-free but will be taxable when withdrawn after age 59 ½.
If your child withdraws before 59 ½, they will pay the regular income tax plus a penalty fee (usually 10%.)
There are always exceptions to these early withdraw penalties. One exception is that your child may withdraw money from the IRA if they are using the money for education or for buying their first home. As someone achieving FI (Financial Independence) though, I highly suggest not having them withdraw any money from the account because there are SO many other ways to pay from college and real estate.
CUSTODIAL ROTH IRA
A major benefit to a custodial Roth IRA is that you do not have to pay taxes on your funds if you do not withdraw until after 59 ½ and participated for 5 years. With this benefit though, your contributions are not tax deductible.
Another major benefit of a Roth IRA for minors is that your child can withdraw money that they contributed (not the earnings) – tax and penalty free at ANY time.
SOME INVESTMENT BROKERS THAT OFFER CUSTODIAL IRAs:
T. Rowe Price
OPTION 2: HIGH YIELD SAVINGS ACCOUNT
Online savings accounts have been gaining more attention every day. Online savings accounts often provide their customers’ much higher interest rates than brick and mortar banks offer.
Since your child’s investment options are limited, this makes a great option as a place to hold and grow their money until they turn 18.
I recommend checking out DCU Banking, which has a 6.17% APY for up to $1000.00 max.
OPTION 3: INVEST IN YOUR CHILD’S EDUCATION
Don’t skip this option.
Let me tell you, I have purchased many self-improvement courses. I can honestly say that I don’t regret ANY of them. Each one has paid for itself many times over.
You can also take your older child to local investor meet-ups. For example, a few months ago I went to a free real estate meet-up. Everyone was so inspiring that I knew I was going to become a real estate investor.
There are also courses designed for younger kids, too. I once came across an ad for a teenager who built a six-figure company at 14 years old and now teaches other kids business skills.
If your child is younger, you can also search around for business books for kids. Invest in anything that will educate your child about the world of finance! Money is knowledge.
Whether your child is a newborn or almost a legal adult, they can start investing for their future. IRAs, high-interest savings accounts, and education are three fantastic ways to invest. Search around or speak with a professional about what options would be best for your child. Be sure to come back and let me know how you or your child invested for their future!
Looking for more ways to invest? Check out my post called, “How to get Free Stocks and Begin Investing Now.”