Teaching children to save and invest a portion of their money, whether from gifts or earnings, gives them a financial head-start on their future and the knowledge basis to help them make wise decisions forever. Because minor children can't own most types of investments in their own name, you'll need to do the bulk of their investing for them through a custodial account.
Decide what you want the child's investments to do for them. You'll probably invest differently if the money is going for your child's college education, than if you are setting aside money for your child's ultimate retirement years.
Determine your child's tax situation and the tax ramifications of different types of investments and accounts. Explore the tax implications of the source of the money you'll be using to invest for the child. For example, you can give your child up to $13,000 per year -- or $26,000 if you give jointly with your spouse -- to invest without incurring gift taxes, as of publication. The earnings on that money is still subject to federal income taxes. Consider the possibility of the so-called kiddie tax, which might result in a portion of your child's investment income being taxed at your income tax rate.
Open a custodial account with the financial institution or institutions that best meet your child's needs. This might be your bank, credit union, mutual fund company, investments brokerage firm or other institution. As custodian for those accounts, you can make investment decisions on behalf of the child.
Diversify the child's investment portfolio across a number of investment products and industry sectors to help reduce risk. Monitor the account and re-allocate assets in your child's investment accounts as she grows.
- As your child grows, include him in some of the investment decisions.
- Children with earned income can contribute to tax-advantaged individual retirement accounts.
- U.S. savings bonds are one of the few investments a minor can own in his or her own name, but minors can't buy bonds on their own. An adult must buy the bonds for the child.
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