Kids and Money
It’s that time of year, when millions of kids head back to school. As you settle into your routine, here’s a gentle reminder: NOW is the time parents, grandparents, caregivers, and friends of young people to talk about money. Why now? Because just like almost every hard conversation, now is a better time than later.
The goal is to help your kids learn core financial concepts and the place to start is the Consumer Financial Protection Bureau’s (CFPB) Money As You Grow website, which breaks down the conversations you should be having with your kids at various ages. The site is divided into broad categories, has prompts to help open a dialogue about saving, spending, debt and investing, and even has a curated reading list for the little ones.
If the kids demonstrate an interest in investing, you could consider opening an account where you can dive deeper with the kids by your side. The easiest way to do so is to open a custodial account, known as an UGMA (“Uniform Gifts to Minors Act”) or UTMA (“Uniform Transfers to Minors Act”) account. Although the parent or guardian is in control of the account while the named beneficiary is a minor, when the child reaches the age of majority (18 or 21, depending on your state of residence), the account is transferred to his or her name.
Importantly, no matter what the kid wants to do with the money, it’s theirs, so you should carefully weigh whether or not you are comfortable with this arrangement. Additionally, custodial accounts are taxable and that means that someone will have to pay Uncle Sam on the interest, dividends and capital gains that the account generates. Be sure to check in with your tax preparer or go to the IRS website, which details who is on the hook for what.
Fidelity Investments created a twist on investing with minors, when it launched its “Fidelity Youth Account”, which is not a custodial account. In fact, “the teen is the owner of the account and has control over it (i.e., they are the sole decision maker, not the teen's parent or guardian).” Scary, but interesting!
If you prefer a more tax efficient account, I recommend a custodial Roth IRA, a retirement account that is geared to kids of any age, who have earned income either from a formal W-2 job or informal gigs, like babysitting, tutoring or dog walking. The Roth is a powerful tool for young people because after depositing a post-tax dollar into the account, all of the earnings grow without taxation. When the money is tapped after age 59 ½, there is NO TAX DUE! Imagine all of those years of ZERO taxes!
With a custodial Roth, the minor can contribute the lesser of the annual limit for a Roth ($7,000 in 2024) or 100 percent of the income earned. Like a custodial account, the named adult maintains control of the account until the minor reaches the age of majority. Of course, telling a 15-year-old that she has to wait until she is 59 ½ to access the money in the account could seem like a bridge too far, but if you encounter push-back, tell the minor that contributions can be withdrawn at any time, for any reason.
Additionally, once the account has been open and funded for five years, the owner can withdraw up to $10,000 in earnings to buy a first home, tax and penalty-free. If college is on the horizon, the custodial Roth can be used to pay for qualified education expenses, without penalty. The one caveat would be that the earnings in the account would be taxed as income.