Top 5 Investment Accounts for Kids in June 2024

Teaching your kids the importance of saving money and investing early can help their funds grow over time.

CNBC Select has compiled a list of the top investment accounts for kids, excluding savings vehicles such as CDs and high-yield savings accounts. The choice of investment account for your child depends on your investment goals for them, whether it's for college education or retirement years. Our methodology explains how we arrived at this list.

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1. Teen-owned brokerage account

Brokerages offer investment accounts specifically for minors, which are suitable for parents who want their older kids to become more actively involved in investing. However, it's important to note that a brokerage account in a minor's name is considered a student asset when determining eligibility for federal financial aid for college, which carries a greater weight than parental assets.

Teen-owned brokerage accounts are a great way to teach kids about money management while keeping an eye on their activity. For instance, the Fidelity Youth® Account allows teenagers to control their own account, but parents can monitor their activity, transactions, and trades. There are no minimums required, and no account fees, and teens can invest in a variety of U.S. stocks, ETFs, and mutual funds.

2. 529 college savings plan

What is a 529 college savings plan and who is it for? A 529 is a state-sponsored education savings account where parents, relatives or friends can make after-tax contributions. Earnings grow tax-free and withdrawals are tax-free if used for qualified college expenses. You don't have to live in the state of the 529 plan you choose.

If your child doesn't need the funds from their 529 plan for college, you have the option to transfer the plan to another child, grandchild, or use it for your own qualified educational needs. Additionally, you can roll over unused 529 funds to the same beneficiary's Roth IRA, tax-free and penalty-free, up to $35,000. However, rules may vary by state.

While 529 contributions are not tax-deductible at the federal level, choosing your state's 529 plan could provide you with state tax benefits as a resident. Here are some 529 plans that offer tax benefits to their residents:

3. Coverdell education savings account

What is a Coverdell education savings account (Coverdell ESA)? It is a tax-advantaged investment option for your child's education, but unlike a 529 plan, there are income limits on who is eligible. The income limit for married couples filing jointly is $220,000 modified adjusted gross income (MAGI) and $110,000 MAGI for single filers. Contributions are not tax-deductible, but your money grows tax-free and withdrawals are tax-free as long as they are used for qualified education expenses (tuition, books, supplies, uniforms, tutoring, etc) for kindergarten through college schooling.

Coverdell ESAs are exceptional because they can be utilized for any level of education, from kindergarten to graduate school. Additionally, they are convenient to access, as parents can open an account at a bank, credit union, or brokerage, and the investment options are extensive, encompassing individual stocks, bonds, mutual funds, real estate investment trusts, ETFs, and more.

4. Custodial Roth IRA

This retirement account is for parents who want to start saving for their child's future. Custodial Roth IRAs require the beneficiary to have earned income, making it ideal for families with an older child who has a part-time job.

A custodial Roth IRA offers tax-free growth and allows for penalty- and tax-free withdrawals of contributions and earnings, with qualifying exceptions like birth/adoption, higher education, or a first-time home purchase. Once the child reaches 18 or 21, depending on the state, they become the account holder.

5. UGMA or UTMA custodial accounts

What is a custodial account? It is a brokerage account that adults can open on behalf of a child and manage until they reach legal adulthood, typically between the ages of 18 and 25. Once the child becomes an adult, they take control of the account and decide how to use the funds. There are two types of custodial accounts available, both governed by the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA). These investment accounts provide kids with the most flexibility in using their funds, with neither account requiring users to earmark funds for retirement or education. Contributions to a custodial account are not tax-deductible, and anyone can contribute to the account.

The minor's name is listed as the owner of the investment assets held in these accounts, which affects their eligibility for federal financial aid for college.

UGMA and UTMA custodial accounts offer flexibility and no contribution or income limits, making them accessible to anyone. Both types of accounts allow for investment in cash, stocks, and bonds, but only UTMA accounts provide the option to invest in real estate assets.

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What kind of investment account should I open for my child?

The ideal investment account for your child depends on your intended goal. For education savings, a 529 plan or Coverdell ESA is recommended. For retirement savings and the child currently earns income, a custodial Roth IRA is the best option. If the child doesn't earn income, UGMA or UTMA custodial accounts or teen-owned brokerage accounts can be used, but with the former, the parent manages until the child is an adult and with the latter, the child manages.

Best place to invest a child's money

Investing a child's money is not straightforward as it depends on various factors, including the child's age, education goals, income, and your comfort level with them managing their own investment account or receiving a lump sum when they become an adult.

How to start investing as a kid

A teenager can begin investing by having their parent open a brokerage account for them, which they can manage on their own. This allows them to buy and trade stocks, ETFs, and mutual funds. Alternatively, a more relaxed approach would be to invest in a custodial Roth IRA if they earn income.

Why trust CNBC Select?

Our mission at CNBC Select is to deliver top-notch service journalism and in-depth consumer advice to our readers, enabling them to make well-informed decisions with their money. Each investment account review is the result of thorough reporting by our team of expert writers and editors, who possess extensive knowledge of investment products. At CNBC Select, we maintain the highest journalistic standards and ethics, and we earn a commission from affiliate partners on many offers and links. However, our content is created independently by our team, without any input from our commercial team or external third parties. To learn more about our methodology and how we select the best investment accounts, please refer to our methodology page.

Our methodology

CNBC Select analyzed the best investment accounts for kids by examining the options available for parents to start investing with their children. We evaluated the reasons for opening an investment account for a child, such as saving for college or retirement, and the unique benefits and restrictions of each account. Additionally, we assessed the educational resources that investment accounts offer to families.

The value of contributions and earnings in an investment account can fluctuate due to market changes, and there is no guarantee of returns. The total earnings are determined by fees, your balance, and the contributions you make to the account.

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