3 Ways to Help Your Kid Invest - Custodial Brokerage Account

Video Transcript

Hey, this is Chris with Money Burst, and we've been talking about three ways to help your kids’ become investors. Now we've already talked about 529 plans and Roth IRAs. So today, let's talk about the custodial brokerage account.

So, as usual, let me break down some terms for you here because, you know, this can be confusing. No one ever explained a lot of this stuff to most of us. So, a brokerage account is just an account where you buy and sell your investments. It could be stocks; it could be bonds. It's just a place where all that lives. It's kind of like how your checking account is the home for your cash - your brokerage account is the home for your investments.

Now, the 'custodial' part of that term just means that this is an account that you're managing for a minor, someone under the age of 18. And once they become an adult, then you can transfer this money over to them. Basically, they take over ownership of this brokerage account and they can manage it on their own. But until they become an adult, you're the one that's going to be handling this stuff for them.

In a previous video, I mentioned Roth IRAs as an option for helping your kids invest. But the thing is, you need to have earned income to participate in a Roth IRA. And that's what makes a custodial brokerage account a great alternative for some of your kids, especially the younger ones, because the requirement is not there. You don't have to worry about that. It's just an account that anyone can open for any reason but, like I mentioned, there are no special tax advantages. So, if you get this account up to a high enough balance, you could start triggering a tax bill. It can get a little complicated. It typically is at the child's tax rate up to a certain point, and then it can transition to yours as the person managing the account. So, you want to be aware that there are some situations in which you could be charged taxes for some of the gains in this account. So that's just the big thing to be mindful of when it comes to these.

But, also, this is a really great tool for showing kids how investing works. Because, unlike with most retirement plans, there's typically a limited number of investments in there. Which there's still great options, but you don't get to see the full spectrum of what investing looks like. With a brokerage account, you can actually go in and show them the whole process of what individual stock tickers are, how you can buy and sell, and the implications of all of that stuff. It's just a great learning tool. Now you don't want to get wild, but also, you can teach them how to have restraint and not treat this as a form of gambling, which some people kind of fall into when it comes to investing.

But I hope this quick series on helping your kids’ become investors was helpful and maybe encourages you to open up one of these accounts for your kids and get them started.