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Strategies for Building an Investment Plan for Your Child

June 27, 2019 · 5 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Strategies for Building an Investment Plan for Your Child

They make you laugh, and they make you cry. You worry about them when they’re out of sight, and even when they’re in plain view. You desperately hope they grow up strong, healthy, and ready to tackle life’s challenges.

After all, they are your pride and joy. Children make parents do some pretty selfless things, and one of the more beneficial thing you could do is plan for their financial future. But how do you do that with everything else you have to worry about in your life?

Fortunately, there are some fairly simple financial tools to help you meet your goals, whether you’re saving for a college education, a once-in-a-lifetime summer camp, or a down payment for their first home.

Depending on your situation, some options might be obvious good choices, while others come with caveats you might want to know about before investing.

With a little background knowledge, you could find an investment plan for your child’s future. An investment for a child could also provide a great education in financial responsibility.

Let’s look at some of the choices.

Custodial Accounts

A simple custodial savings account in your child’s name could be a good start as an investment for a child. When a baby is born, everybody from Grandma to Uncle Joe may want to contribute to the account. Unlike college savings plans , which require the funds be used for education, custodial accounts offer a lot of flexibility.

Savings can be used for almost anything—a European vacation, car for college, pre-college expenses—as long as it is for the benefit of the child. Just remember, any money in an investment account for a child is irrevocably in their name and for their benefit . You can’t take it back.

A custodial account could be a great vehicle for children to learn how to invest. In fact, if you’re wondering how to buy stock for a child to help them learn about money, a custodial account might be a great investment account for a child. You could pick a company they would be excited to follow, like Disney or McDonald’s, and let them watch over time.

Custodial accounts, also known as Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors
(UTMA) accounts, don’t have a limit to how much you can invest. While contributions aren’t tax-deductible, there may be a tax advantage because it’s in the child’s name.

But that advantage might quickly turn into a disadvantage if unearned income from dividends, gains, or interest reaches a certain amount. Then the account is subject to the Kiddie Tax , which Congress enacted to prevent abuse of the financial vehicle by parents. With a custodial account, you can gift up to $15,000 in 2019 for each child; double that if you’re married and filing jointly. Above that you’re liable for the federal gift tax .

While you can use the money in the account to pay for various things your child needs, one caveat is that the child gets full control when they reach the age of majority, usually 18 or 21 years of age.

Custodial accounts might be good for modest, defined goals, such as paying for education, orthodontia, or academic camps, for example. If there is a sizable sum of money in the account, consider whether you want to transfer that amount, unregulated, to someone of such a young age. In that situation, one idea might be to have a lawyer draw up a trust to set up specific parameters you can live with.

If the thought of giving up control is too much for you, you could set up a guardian account in your name so you can decide how the money is spent. Essentially, it’s a way to earmark funds to give to your child down the road.

College Savings Accounts

A Coverdell education savings account or a 529 savings plan could be a worthy option for a child. They offer two ways to pay for educational costs, whether college or K–12 schooling. The Coverdell allows you to contribute up to $2,000 a year for education expenses. While contributions are not tax deductible, withdrawals are tax-free.

Coverdells have two areas where they might have a slight advantage over 529 accounts: You can select from a wide range of investments and the money you withdraw can be used for any qualifying education expenses, such as books, tutors, and equipment.

The 529 college savings plan tends to be a popular way to save for college. You can make larger contributions than you can with a Coverdell account, and any withdrawals for qualified education purposes are tax-free.

As of 2018, Congress allows withdrawals of up to $10,000 for K–12 tuition. Not all plans or states that sponsor 529 plans are in line with the new rules , so you might want to ask a tax expert or the manager of the plan about your options.


Custodial (Traditional)

Custodial IRAs are another investment option for a child. They work just like a traditional IRA, so when your child has earned income from a first job, babysitting, or other work, they (or you) can contribute up to $5,500 annually . Starting early might be a way to teach them about the power of financial stewardship.

With a traditional custodial IRA, your child will pay ordinary income tax when they withdraw the money in retirement, and they must begin doing so at age 70½ . Contributions are also tax deductible, which probably won’t benefit them if their income is still low or they don’t meet the $12,000 standard deduction threshold requiring them to pay federal income tax.

Both traditional and Roth custodial IRAs convey to the child at the age of majority (18 to 20 years of age, depending on the state).


Just like traditional IRAs, contributions to a Roth IRA also grow tax-free over the years and have the same contribution limits—however, the Roth could be an investment possibility for your child if you value flexibility. Whether you’re saving for college or retirement, it might offer more advantages for your child over the decades than a traditional IRA.

While you still pay tax on each contribution, all withdrawals are tax-free , which could be a big benefit to your child, assuming they’ll be in a higher tax bracket at retirement. There is no required minimum distribution when they must start withdrawing.

One of the biggest advantages to a Roth is that your child could use the contributions for any reason besides retirement. But two special perks of the Roth include the ability to pay for certain higher education expenses and withdraw up to $10,000 to buy their first home. On the other hand, if withdrawn before retirement, earnings can be taxed and your child could be penalized in addition.

Growing Wealth for Your Children

When it’s time to get serious about saving—for college, retirement, or something else—you could set up an account with SoFi Invest®. It’s easy to open an investment account with SoFi, and you’ll have access to complimentary financial advisors and other benefits to help your family save for a bright future.

Finding the right investment plan for a child doesn’t have to be a chore. Start building for your children’s futures and open a SoFi Invest account today.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.


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