Author: Tyler McCain

Tyler graduated from Georgia State University in 2019 with a bachelor’s degree in finance. He is a former Wealthy Habits instructor.

At this point, we have discussed child whole life policies and 529 plans in articles on the Wealthy Habits blog. In those articles, I referenced a third option for saving for your child’s future – creating an investment account. There are many advantages to this option, but it does not provide the tax benefits present in child whole life policies or 529 plans.

Let’s look at the advantages of investment accounts. The first is that since you have complete control of the account, you can create a more fluid dialogue with your child about the investments and even allow them to suggest investment options for a small percentage of the assets. This is a huge plus, as you will not be managing this account forever. By getting children interested in investing in the markets now, they will be more likely to continue to pay attention to the markets and their personal finances in the future.

When it comes to opening an account for children, you will typically see two options. The first is an UGMA (Uniform Gifts to Minors Act) account. With this account, you can deposit funds for securities purchases. The account becomes the child’s at either age 18 or 21, depending on your state.

There are some minor tax benefits to setting up an UGMA account compared to holding the assets in another account and dispersing them to the child at age 18 or 21. Specifically, the first $1,050 of unearned income is tax-free, and the second $1,050 of unearned income is taxed at the minor’s tax rate. All earnings beyond that are taxed as capital gains and passed on to you. Overall, this results in tax savings over holding your child’s assets in your personal investment account.

The second option that you might see is an UTMA (Uniform Transfers to Minors Act) account. The primary difference between these two accounts is that under an UTMA, you can transfer more than just securities, including patents, real estate and art. You can also lock these assets away until a child is 25 years old.

Once an account is open, it is time to decide exactly how to allocate the money. If your child is an infant and you plan to put more money into the account each year, it might be beneficial to create a more aggressive allocation. As your child ages, you are going to want to protect some base level. As this protection is needed, you can lower the overall risk through purchasing blue-chip stocks or fixed-income assets.

Another important thing is to get your child involved in the allocation of the account. Parents who have allowed their children to make decisions on allocations have said that that their children share financial articles and do legitimate research on companies and the stock market. Getting children interested now could save a lot of grief and misunderstanding as they get older.

At Wealthy Habits, we teach teens about planning for the future by making smart financial management decisions.  Another session of Wealthy Habits online courses are starting in October.