Financial Accounts Parents Can Open For Their Children
By Maura C. Schauss, CFP
As parents, it’s in our very nature to want to take care of our children. We are wired to want the best for them and do everything in our power to give them a leg up in life. One way to do that is by helping them with their finances.
With only 24% of Millennials demonstrating basic financial literacy (even though 69% rated their knowledge highly),1 parents are beginning to realize that it’s up to them to teach their children the skills they need to survive in the real financial world. One way to teach your kids about money and give them a strong financial foundation for the future is by opening a financial account in their name. Here are some of the financial accounts that you can open for your children:
With a parent or other responsible adult listed as a joint owner, most bank accounts have no minimum age requirement. In fact, some people even open savings accounts for their babies. It is a lot harder to find banks that will allow minors to open accounts alone, without an adult, though, because of contract laws.
The adult who jointly owns the account with the child usually manages the money until the child is mature enough to do so. Setting up your teen with a checking account with a limited balance and a debit card can be an excellent learning opportunity, great practice for life in the real world when they will have to be paying their own bills.
UTMA (Uniform Transfer To Minors Act) Account
Another option is a custodial account. Under UTMA, money, securities, patents, royalties, real estate, and fine art can be gifted to a minor while the gift giver or appointed custodian maintains control of the gift. These accounts are not for the use of the child, like a checking account, but rather adult-managed for the benefit of the child. The child has no access to the assets in the account until they are of legal age, but they are the legal owner of the assets as soon as they are gifted.
Because the child is the owner of the assets, an UTMA account can affect the child’s ability to receive college scholarships and financial aid. Also, all withdrawals and dividends are taxed to the child, at the child’s tax rate.
Thanks to UTMA, you can also open a brokerage account for your child to get involved in the stock market. Since your child is a minor, it will have to be a custodial account in your name and your child will not have full control over it until they become a legal adult. If you are opening the brokerage account for your child to experiment and learn, you will want to use a broker that has no fees and no minimum initial deposit.
Custodial Roth IRAs
If your child has earned income, they are eligible for a Roth IRA. Money earned doing chores around the house does not count as earned income for a Roth, but money earned mowing the neighbor’s lawn does. Your child can contribute as much as they earn, up to the maximum of $5,500 for 2018.
While designed as a retirement savings vehicle, money that has been in a Roth IRA for at least 5 years can be taken out penalty-free to pay for approved college expenses or $10,000 can go towards a down payment on a first home. As with the other accounts, a responsible adult must be named as a custodian on the account to manage it until the child is of age.
If you have any questions about opening an account for your child or how you can help your child gain financial literacy, call our office at 703.584.2700 or email firstname.lastname@example.org. We want to partner with parents like you to help raise up a financially savvy generation of young people.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.