How to open an investment account for a minor

If you want to introduce your kids to investing or they’re interested themselves, minors have limited options for opening investing accounts. They can’t open an account on their own, so they need a custodian, such as a parent or guardian, to open the account with them. Here’s an overview of the types of accounts you can open for a minor and how to open one. 

Types of accounts

• Custodial (UTMA, UGMA)

• 529 college savings plans

• Coverdell education savings accounts (ESA)

• Custodial Roth IRA

Custodial accounts (UGMA and UTMA)

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Custodial accounts are in the custodian’s name for the benefit of the child. The money can only be used for the child, and it transitions into the child’s name once they become an adult – typically, age 18 or 21, depending on your state’s laws. 

Custodial accounts have no contribution limits, but if you contribute more than the annual gift tax exclusion per year, you may be liable for gift taxes. In 2025, the annual gift tax exclusion is $19,000 per person, or $38,000 for a married couple. The amount of money within a custodial account may also impact financial aid when applying for college. 

College savings: 529 and Coverdell ESA

A 529 plan allows you to contribute money that grows tax-deferred for a child. Withdrawals for qualified education expenses are typically tax-free. Some states offer tax deductions or tax credits when making contributions to that state’s 529 plan. These plans allow for unlimited contributions, without income limits.

A Coverdell ESA also allows for tax-deferred growth and tax-free withdrawals for qualified education. States don’t offer tax deductions or credits, and the contribution limit is $2,000 per year. However, Coverdells are more flexible in allowing funds to be used for K-12 expenses and typically offer more diverse investment options when compared to 529s. 

In terms of distributions, Coverdells must be fully distributed within 30 days of the beneficiary’s 30th birthday, except in the case of special needs. For 529 plans, unused funds can remain in the account indefinitely to be used by the beneficiary or another family member. Leftover funds in a 529 plan can also be transferred into a Roth IRA under certain conditions. 

Custodial Roth IRA for working minors

If your minor child has earned income, such as from a part-time job, then you can open a custodial Roth IRA account. The amount of money they can contribute each year is limited to $7,000 in 2025, or the child's earnings for that year, whichever is less. Just like a Roth IRA, money grows tax-free, and you can access your contributions penalty-free and tax-free. Money that has grown beyond the contribution amount would be assessed a 10% early withdrawal penalty and would count as income for tax purposes. Once the child becomes an adult, you can convert the account to a regular Roth IRA. 

Choosing the right account

To decide which account is best for you and your minor child, consider the following factors:

• Investment goal: Are you investing for education, retirement, or general savings?

• Tax treatment: Do you need an account that allows you to defer taxes into the future? 

• Contribution flexibility and limits: What type of flexibility do you need in making contributions?

• Impact on college financial aid: Would the account potentially affect your child’s financial aid eligibility?

• State-specific rules: Research your state laws and how it handles each type of account to ensure it’s the best fit. 

How to open a custodial investment account

Once you’ve determined your goals and the best account, here’s a brief overview of how you can open a custodial account for your child:

• Compare providers to determine the best fit. Consider fees, tools, investment choices, accessibility, and comfort level.

• Gather all required documents, including the minor’s Social Security Number, custodian identification, and proof of address. Consult your provider to determine specific document requirements. 

• Complete an application to open the account, either online or in person.

• Fund the account with an initial investment, and decide whether you want to automate future contributions. 

• Determine which investments to purchase in the account. 

• Involve your child in the process, allowing them to monitor the account’s progress, ask questions, and continue to learn and grow.

• Understand the transfer process once the child becomes an adult to ensure a smooth transition. 

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Helping your child accelerate their financial growth

Even though minors typically can’t open investment accounts on their own, that doesn’t mean they can’t invest. Decide the best route for your child to begin their investing journey, involve them in the process, and make adjustments as you go. Once they’re ready to take over the account themselves, they’ll have the knowledge and experience to make smart financial decisions as adults.

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