We did it! We opened a Custodial Brokerage Account for our 11-year-old, Pinto Bean.
After years of listening to mom and dad talk about the importance of saving and investing, (Teach Kids About Money Early) Pinto asked if he could open his own investing account with the money he got for Christmas.
He has been very good about saving the monies he gets from Birthdays, Holidays, and the Tooth Fairy to the point that is was burning a hole in his piggy bank (What Mr. Beast Teaches Kids About Money). And now that he gets an occasional babysitting job, he wants to invest, in his own name.
So, I jumped onto Vanguard and helped him open his own Custodial Brokerage Account.
What Is a Custodial Brokerage Account?
What is a Custodial Brokerage Account you might ask? Essentially, it is a brokerage account for investing where a child can store and invest money while they are underage.
Because the child is a minor, the account is held in the name of both the child AND a custodian (parent, grandparent, etc) But the money in the account belongs to the child and can only ever be used for the benefit of the child.
Monetary gifts from grandparents or parents can be contributed. Babysitting money, tooth fairy money, or any other monies can all be thrown in while the child is a minor.
And taxes are minimal. So long the account earns less than $1,100 in capital gains, the child will owe no taxes. The next $1,100 is charged at the child’s tax rate, and anything over $2,200 will be taxed at the custodian’s tax rate. (Learn more about Taxes on Custodial Brokerage Accounts)
When the child comes of age (21 in most states) they are able to open their own individual brokerage account and take over the money.
As Pinto Bean summed it up “I can put money in when I’m a small person and use it for what I want when I’m a big person.”
Why I Was Not A Fan of a Custodial Brokerage Account for Adult Expenses
If you read my article “How to Save Money For Your Kids” a while back, you might have caught on to the fact that I have never been a fan of a Custodial Brokerage Account as a way to save money for your kids.
There are so many other options and a Custodial Brokerage account allows too much freedom for a young adult. As soon as they become of age, they are completely free to take the hard-saved dollars YOU, as the parent, have put away for them and go on a spending spree, if they choose.
We have always just held a brokerage account in our names and designated it for “adult expenses” for each kid. Things like college, weddings, house down payments, etc. We put money in each month that we plan to use for them when they’re older. We also have a regular high-yield savings account as well as a 529 that we throw a few dollars into each month.
The money in these accounts is our way of us saving to help them in the future. Not just let them go nuts at 21 if they so choose.
Why Did We Open a Custodial Brokerage Account?
Pinto Bean is now 11 years old and starting to think about his future. He’s had it crammed into his head since he was a baby that saving and investing are important for your future. Investing just a few dollars as a young person will allow it to grow into real money later in life.
$1,000 invested at 11 years old with an average 7% return will become $10,000 by the time he turns 45. That may not sound huge but if he were to continue investing just $1,000 a year, he would have over $138,000 by the time he was 45. Compound interest is amazing.
He also knows that the money WE save for him and his sister is designated for specific purposes only. (House, college, wedding, etc.)
Now that he is old enough to get some small babysitting jobs, he wants to put away money that HE can choose how to use in the future, be it buying a new car, going on a crazy trip, or whatever. He may even just keep it at part of his early retirement plan. It’s up to him!
With a custodial brokerage account, HE has control of how he spends his money the minute he turns 21. Until then, he plans to contribute half of all money he receives and invest it in VTSAX (Vanguard Total Stock Market Index).
How to Open A Custodial Brokerage Account For Your Child
If you already have a brokerage account at a low-cost brokerage like Vanguard or Fidelity, it is super easy to open a custodial account for your child.
All you need is their social security number, name, and birthdate.
(If you do not already have an account, you will need to go through entering all of your info as well, just like opening any other bank account.)
- Select that you want to open a new account.
- Choose a custodial or UTMA(Uniform Transfer to Minors Act)/UGMA (Uniform Gifts to Minors Act) account and fill in the necessary information.
- In the end, you will be asked to fund the account. If you have not already done so, you can do this easily by connecting your bank account and setting up a transfer.
What Should They Invest In?
Most young people opening a Custodial Brokerage Account have a lot of time to let their money grow. One of the easiest ways to take advantage of the great growth in the stock market, long term, is to invest in a Total Stock Market Fund or S&P 500 type Index fund.
An index fund simply follows an index of stocks. For a Total Stock Index Fund, you get to own a little piece of every publicly traded stock in the country. For an S&P 500-type index, you get access to the top 500 companies on the market. (Check out my post on Super Simple Investing)
What We Bought
Because we had already been putting all of Pinto’s gift money into the brokerage account in our names his entire life, we just transferred the funds necessary to get him into VTSAX with Vanguard because that’s where we already had our accounts. This is a Total Stock Market Index fund. The fund has a minimum opening purchase price of $3,000.
(This transfer will show up as selling shares on our taxes this year, potentially triggering a small amount of capital gains tax but with the down market recently, we are not worried.)
Once we purchased an opening VTSAX fund, Pinto can contribute as much or as little as he wants in the future. We’ve made $2.79 purchases in the past.
Most people don’t have $3,000 sitting in an account to purchase VTSAX. In this case, if you want to stick with Vanguard, VTI is an ETF version. It allows you to buy the Total Stock Market in chunks, like an individual stock. A lot of brokerages even allow fractional purchases right away now which is a huge help for investors just starting out.
Make Sure to Compare Different Brokerages
Many Financial bloggers rave about Vanguard because they were the original low-cost Index fund brokerage and are 100% owned by their investors so costs have always been low. That’s why I opened our accounts with Vanguard 9 years ago.
Recently, Fidelity has really been kicking it up a notch in order to compete. They came out with their own $0 to open Total Stock Market Index Fund, FSKAX.
Another good option is M1 Finance. They allow you to set up an investment strategy and handle contributions and asset balancing automatically.
I was too lazy to deal with trading brokerage companies when it came time to open Pinto’s Custodial Brokerage Account, but if you aren’t already set up at another brokerage firm, these might be great places to start looking.
What About the Future?
As of now, a Custodial Brokerage Account is a great option for Pinto Bean to save money for his future. It allows him to make his own investments now and have access to the money when he is older.
Right now, he doesn’t have a “real job.” He babysits maybe once or twice a month and earns maybe $11-14. As soon as he gets a real job, or greatly increases his babysitting income to where he will qualify for filing taxes, he will open a Custodial Roth IRA (Individual Retirement Account) just like his aunty and begin putting money away in the Tax-Advantaged account (Even a Teen Can Save For Retirement)
For now, we are just excited to have made this next step in his financial future!
Wrap-Up
As a parent, saving for our children’s “Adult Expenses” in a Custodial Brokerage Account just never made sense to me. I remember being 21 and can tell you I probably wouldn’t have just left a pile of cash sitting unused. And I was the responsible one in my friend group!
But now that my child wants to start investing his own money, I am more than happy to help him start early and a Custodial Brokerage Account is just what he needs. It is 100% his, now and in the future. I’m just here to guide him and teach him about money as much as possible while he’s still under my roof.
What do you think? Have you ever opened a Custodial Brokerage Account for your child? Do you have any concerns holding you back?
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