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Investing for Kids: A Parent's Plain-English Starting Guide
Most articles about investing for kids are written by companies that want to sell you their app. This one is not. The goal here is to lay out the three real options a parent has, in plain English, with what each one actually costs, who owns the money, and what to say to a 7-year-old versus a 14-year-old about it.
Investing for a child means putting money into assets (stocks, index funds, sometimes bonds) on their behalf, with the expectation that the money grows over years or decades. The catch: a child under 18 cannot legally own a brokerage account in most U.S. states. So someone older has to hold it for them. That is what 'custodial' means.
The Three Real Options, Compared
| Option | Who Owns It | Tax Treatment | When Kid Gets Control | Good For |
|---|---|---|---|---|
| Custodial brokerage (UTMA/UGMA) | Child (you manage until 18 or 21) | First $1,300 tax-free, next $1,300 at kid's rate, above that at parent's rate (2025 kiddie tax rules, IRS) | Age 18 or 21, depending on state | General long-term investing, no income limit |
| Custodial Roth IRA | Child | Tax-free growth, tax-free withdrawals in retirement | Age 18 or 21, depending on state | Kids with earned income (babysitting, tutoring, paid chores via a business) |
| 529 plan | You (account owner) | Tax-free growth if used for education | You control forever | College, K-12 tuition, some apprenticeships |
UTMA and UGMA are the same idea with small legal differences. UTMA (Uniform Transfers to Minors Act) allows a wider range of assets and is available in every state except South Carolina, which still uses UGMA. Once you put money in either one, it belongs to the child. You cannot take it back, and at the age of majority they can spend it on whatever they want. That is the trade-off for the simplicity.
What This Costs in 2025
Most major brokerages now offer custodial accounts with no minimum and no annual fee. Fidelity, Charles Schwab, and Vanguard all run $0 commission stock and ETF trades. Apps targeting kids (Greenlight, GoHenry, Acorns Early) charge $8 to $16 per month. For pure investing, the brokerage route is cheaper. The kid-focused apps are paying for the debit card and parent dashboard, not the investing.
Age-Tiered Scripts: What to Actually Say
The reason most parents stall on this is not the paperwork. It is not knowing how to talk about it. Here are scripts that match how kids actually think at each stage.
Ages 5 to 8: The Tree Story
"When you put money in a savings jar, it just sits there. When you invest it, the money grows like a tree. Every year, the tree gets a little bigger on its own. The longer you wait, the bigger it gets." At this age, the goal is the feeling that money can grow without working. Use the birthday money calculator to show what $50 a year for ten birthdays could become.
Ages 9 to 12: The Owning a Piece Conversation
"When you buy a stock, you own a tiny piece of a real company. If you buy Apple stock, you own a little slice of Apple. When Apple sells more iPhones, your slice is worth more." This is the age to pick one or two companies they recognize and let them watch the price. Not as a gambling exercise. As a 'this is real and connected to the world' exercise.
Ages 13 to 15: Compounding, With Real Math
This is when compounding clicks. "If you invest $100 today at 7 percent per year, in 10 years it is $197. In 30 years it is $761. In 50 years it is $2,945. The waiting is what makes the money." 7 percent is the long-run real return of the S&P 500 after inflation, per multiple long-term studies (Damodaran NYU dataset, Vanguard research). Show them the curve, not just the numbers.
Ages 16 to 18: The Roth Conversation
If they have a real job with a W-2 or 1099, they qualify for a Roth IRA. The pitch: "Every dollar you put in now grows tax-free forever. If you put in $3,000 at age 17 and never add another dollar, at age 67 it is worth about $90,000 at 7 percent. The IRS will never touch it." Talking about taxes at 17 sounds early. It is not. This is the age where the math is most persuasive.
How to Start, in Order
- Decide which account type fits. No earned income means UTMA/UGMA. Earned income and long horizon means custodial Roth. College-only goal means 529.
- Open the account at a no-fee brokerage. Fidelity and Schwab both let you do this online in about 15 minutes. You will need the child's Social Security number.
- Pick a target-date or total-market index fund. VT, VTI, or a target-date 2050+ fund covers the whole market in one purchase. Skip individual stock picking for the core money.
- Set up an automatic monthly transfer, even if it is $25. Consistency beats amount.
- Show the child the account at least twice a year. Not the daily moves. The yearly growth.
Where In-App Savings Fits
For younger kids who are not ready for stock market volatility, a structured in-app savings setup teaches the same habit (set aside, watch it grow) without the emotional weight of seeing a number drop 20 percent in a month. The wants vs needs framework and a simple budget planner handle the foundation. Allowance from a chore chart gives them the cash flow to actually save. Once a child has $200 to $500 saved and is asking real questions about how it could grow faster, that is the signal to open the custodial brokerage.
The Honest Trade-Offs
The biggest risk with UTMA/UGMA is loss of control at 18 or 21. If you have saved $40,000 by then, your child can legally spend it on anything. Families who want guardrails past that age sometimes use a 529 (which you keep control of) or a trust. The biggest risk with the Roth is the earned-income rule. The IRS audits these. Pay your kid through a legitimate business with real records, or skip it.
The biggest risk with kid-focused investing apps is fees. A $7 monthly fee on a $500 account is 16.8 percent per year. No investment beats that.
Frequently Asked Questions
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The math says as early as possible. A dollar invested at age 5 has 60 years to compound before retirement, versus 50 years if started at 15. According to Vanguard's long-term return data, that extra decade roughly doubles the final value. The practical answer: start when you have a stable emergency fund and can commit even $25 a month consistently.
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For a child with earned income, yes, the Roth is usually better because growth and withdrawals are tax-free in retirement. The IRS requires the child to have documented earned income (a W-2, 1099, or legitimate self-employment). Babysitting and lawn-mowing count if you keep records. For kids without earned income, UTMA/UGMA is the only brokerage option.
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For 2025, the IRS allows the first $1,300 of a child's unearned investment income to be tax-free. The next $1,300 is taxed at the child's rate. Above $2,600, unearned income is taxed at the parent's marginal rate. This applies until age 19, or 24 if the child is a full-time student. Source: IRS Publication 929.
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In most states, UTMA accounts transfer to the child at 21, UGMA at 18. Some states allow up to 25 for UTMA if you specify it when opening the account. Once transferred, the child has full legal control and can spend the money however they choose. There is no clawback. Custodial Roth IRAs also transfer at the age of majority.
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For investing only, a regular brokerage like Fidelity or Schwab is cheaper because there are no monthly fees. Acorns Early ($8 per month) and Greenlight Max ($10.98 per month) bundle a debit card, parent dashboard, and investing. The bundle makes sense if you actually use the debit and chore features. If you only want investing, the $0-fee brokerage wins on math.
Turn allowance into real money lessons
Penny Time turns allowance into playful Quests where kids make real money decisions and see how each one turns out. Parents stay in charge of every cash-out. Free for the whole family.
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