How to Get Your Kid Started With Investing?
But it got me thinking: where better to keep the money she's not using? A recent job she took on earned her a good amount of pocket money. Also, she always gets some money on her birthday, but she doesn't spend it much. Maybe an investment account? Investing rules for minors are slightly different than for adults, but getting children to invest is not difficult.
Even low-income experiences can encourage people to start investing in retirement early in adulthood, which can lead to lifelong preparation. How to teach kids the basics of investing.
Determine what kind of account to set up
Your child may open a savings, checking, or brokerage account using the Uniform Money Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). All that's required is for an adult (probably you) to sign up as an account administrator.
This means that you will have to approve how your child spends that money until they reach adulthood. d If you are logged into this account, it can only be used for your child. You cannot credit your child's $100 to her UTMA account and later return it or transfer it to another child. Setting up a UTMA account is similar to setting up any other account. You can go to a bank or credit union to fill out paperwork and present your ID to open an account for your child, or you can sign up online with a company like Vanguard. Your child can also set up his UTMA 529 savings plan.
529 is a college savings model that offers tax benefits, but also has spending restrictions.
See below for details. Apart from a traditional brokerage account, your child can also try micro investment accounts as they are likely to start small. In fact, you can set up a custodian account through Stash or Stockpile. Stockpile also works with BusyKid, an app that helps families track their kids' chores and pay their pocket money digitally. In addition to an investment account, you may also need to open a checking or money market UTMA for your child and link it to your brokerage account to fund your brokerage account and receive dividends or other income.
Children may not set up a traditional or individual Roth retirement account unless they are earning income.
Figure out what investment vehicles to use
Once an account is set up, children will have access to the same investment products as adults, including mutual funds, individual stocks and exchange traded funds. Which product you choose depends on your interests, available funds, and how aggressively you want to invest. Children interested in following the news of one or more companies and making positive investment decisions may wish to purchase individual stocks. Look for brokers with no minimum deposit (or low minimum deposit) and low transaction fees.
This is a concrete and inspiring way to understand the stock market, but let your kids know that many financial advisors recommend long-term investments in funds rather than individual stocks.
Will investing hurt their chances of getting college aid?
If your child doesn't have an individual company in mind, but wants to invest in a broader market, mutual funds such as the S&P 500 index fund are a good option. Great products come at a low cost, so your child can keep more of their investment in their pocket. Unfortunately, mutual funds usually require a minimum investment. For example, to buy shares in his S&P 500 Index Fund, which Charles Schwab highly recommends, you need to open a Schwab Brokerage account with an initial deposit of $1,000.
However, there is a workaround. With a $100 deposit he could also open a Schwab account, but after that he would have to deposit another $100 every month until the account balance was $1,000. Your child can also purchase exchange traded funds, which function similarly to mutual funds but tend to have lower minimum investment amounts.
However, there is a workaround. With a $100 deposit he could also open a Schwab account, but after that he would have to deposit another $100 every month until the account balance was $1,000. Your child can also purchase exchange traded funds, which function similarly to mutual funds but tend to have lower minimum investment amounts.
Another way to start with a small initial investment is to use one of the above micro-investment apps that split a stock or his ETF and sell a portion of it to investors. By characterizing investments by category, these apps make it very easy even for young children to get started.
These services usually charge a monthly fee in exchange for being very easy to use. Stash costs $1/month. Your child may choose to invest in government bonds or certificates of deposit, but with today's low interest rates, it's probably not a very exciting way to learn about investing.
What about taxes?
Do your children have to pay taxes on capital gains? Do they have to file their own tax returns? The answer to both questions is "it depends."
If your child's capital income is less than $1,050, you have nothing to worry about. You do not need to report this to the Internal Revenue Service. If the child's capital income is less than her $12,000, the parent can choose to include it on their tax return or file a separate tax return on behalf of the child. Anything over $12,000 will require you to file a tax return for your child.
What about taxes?
Do your children have to pay taxes on capital gains? Do they have to file their own tax returns? The answer to both questions is "it depends."
If your child's capital income is less than $1,050, you have nothing to worry about. You do not need to report this to the Internal Revenue Service. If the child's capital income is less than her $12,000, the parent can choose to include it on their tax return or file a separate tax return on behalf of the child. Anything over $12,000 will require you to file a tax return for your child.
What does your child pay?On unearned income up to $2,100, she is taxed between 0 and 10 percent depending on the type of income. Your child's unearned income is then taxed at your rate, whether you file it separately or together. So don't think you can save a lot of money in taxes by transferring all your investment accounts to your kids. The IRS discovered this move years ago.
If your child chooses to fund her UTMA 529 plan, you will pay federal (and typically state) taxes on that income as long as you spend it on qualifying educational expenses such as college tuition and textbooks. No need to pay.
Will investing hurt their chances of getting college aid?
When applying for a student loan, it is important to note that assets on behalf of a child are weighed more than assets on behalf of a parent. It is important. Unless you're sure your family won't qualify for financial assistance (usually we don't know anything other than the 1% amount in advance), encourage your child to choose a short-term investment account goal. I could choose any goal, from buying a new LEGO set, to a week-long sleep camp, to my first car. Again, things change a bit when investing in a 529 plan.
The Financial Assistance Authority considers the assets in the 529 account to be the assets of the parent, even if the child is the account holder. This is great because only about 5 percent of a parent's wealth counts toward financial aid eligibility, compared to 20 percent of a student's wealth in a non-529-UTMA account.
If students are self-investing their college savings, let them spend their money first before using the 529 plan or any other savings you have for education.
From: Carrie Kirby