Types of accounts
When you're ready to open a brokerage account for a child, the first thing to research is the types of accounts. Options include:
- Custodial accounts
- Teen-owned brokerage accounts
- Individual retirement accounts (IRAs) for children who earn income
The sections below will cover each of these options in more detail.
Custodial account
With a custodial brokerage account, you don't own the money -- your child does. As long as your child is a minor, you control the account, but any withdrawals (or dividends) can be taxed to your child, who will likely have a much lower tax rate than you. As the custodian, you can't make withdrawals except to cover certain expenses for the benefit of the child. In other words, you give up some long-term control (as well as ownership), but it's usually a better deal from a tax standpoint.
There are two types of custodial accounts:
- A Uniform Gift to Minors Act (UGMA) account can be used to invest in securities, including stocks, bonds, and mutual funds.
- A Uniform Transfers to Minors Act (UTMA) account can be used to invest in securities and other assets, such as real estate, art, and patents. The UTMA account is a popular estate planning tool for transferring assets as an inheritance.
Outside of the fact that UTMA accounts give you more investment options, the other difference between these accounts is where they're available. UGMA accounts are available in every state. UTMA accounts aren't available in South Carolina and Vermont.
There's no maximum contribution limit for custodial accounts. Custodial accounts are considered the child's asset. That means they can impact financial aid eligibility.
Teen-owned brokerage account
A relatively new option is a teen-owned brokerage account. Fidelity introduced this option with Fidelity Youth™, a free app available for those ages 13 to 17. It allows teens to manage and invest their own money.
This is not a custodial account. It's owned by the teen, not the parent. However, a parent or guardian must open the account on behalf of their teen. The teen can invest in U.S. stocks and Fidelity mutual funds, and parents can view trades and transactions in the app.
While Fidelity Youth accounts don't have trade limits, there is generally a $30,000 annual maximum that can be added to the account.
Fidelity is a top-rated stock broker that made our list of the best custodial accounts. Read our Fidelity review to learn more.