Follow and listen to our podcast

StashLearn
Get the app
Get the app

Join millions of investors on Stash

Investing, simplified

Start today with as little as $5
Get the app
Teach Me

How Custodial Accounts Can Help Your Kids Learn About Investing

January 26, 2018

  • Many adults don’t teach their children about investing
  • A custodial account can be used to teach kids the basics
  • It’s a great way to teach and plan for a child’s future
3 min read

Imagine if you could teach your children the basics of investing, they might have an important leg up when they become adults. What you teach them could pay off in dividends—literally.

They could gain more confidence by knowing the difference between stocks, bonds, mutual funds, and exchange-traded funds (ETFs), as well as  the difference between a 401(k) and an individual retirement account, or IRA. This information can help them throughout their adult lives, even into retirement.

One way to start teaching your child about investing is through something called a custodial account.

What is a custodial account?

A custodial account is a type of savings account that lets you put money away for your children. You can contribute to it until your child reaches adulthood, which is between 18 and 21 years old, depending on state law. Once you’ve funded the account, you can invest the cash just like you would in any other investment account, in stocks, bonds, mutual funds, and ETFs.

Learning how to invest could help both you and your children have a more secure financial future

Here’s something important to keep in mind: Once you’ve set up a custodial account for your child, and it’s considered a permanent gift to the child, and they own it and control it once they become adults. In other words, you can’t take the money back—it’s your child’s money the moment you set up the account.

If you decide to pull money out of the account, it must be for the child’s exclusive benefit and not your own. That means you can’t use it to pay for things like the family grocery bills, rent, or a family vacation.

You can use the money in the account to pay for educational expenses, tutoring or computer equipment, for example.

Another potential use for a custodial account could be to teach your child about investing.

Why custodial accounts can help teach teach your kids to invest

Think of a custodial account as a set of training wheels that can get your kids excited about the world of investing. With a custodial account, you can teach them the difference between a stock and a bond, a mutual fund and an exchange traded fund, or ETF. You can also teach them about what returns are, and how to diversify. For example, they can help you choose the stocks of companies they’re excited about and influence their daily lives, which could include Apple, Disney, Facebook, or Nike.

Important lessons

Your children can check these stocks periodically, and see how they perform over time. While they might see stocks go up, they’re also likely to see them go down. That can spark a discussion between you and them about how the investing road is not always linear—it gets bumpy, and sometimes they may even lose money.

Remember, investing with a custodial account holds the same risks as investing with any other account. Your investment may go up or down, depending on the markets.

Furthermore, custodial accounts are considered an asset for your child. That could interfere with his or her ability to get financial aid, according to the Financial Industry Regulatory Authority (FINRA).

What if I don’t know how to invest?

You might be thinking:  “This is great, but I can’t help my child invest, because I don’t even know how to do it myself.”

Fair point. But that doesn’t mean you can’t learn. The basics of investing may seem really complicated on the surface, but they aren’t rocket science. All it takes is some studying up on your part so that you’re prepared to teach your kid.

You can find good introductory investing books at your local library, and you can listen to investing podcasts and video blogs, or read through Stash’s Learn archives to find out more.

Learning how to invest could help both you and your children have a more secure financial future.

By Lindsay VanSomeren

Next for you
Auto-Stash! How it Helps You Get the Most Out of Your Investments

Investment Profile

Bonds Worldwide

An International Bond ETF on Stash

Learn more
Explore more articlesChoose a topic to learn more about
love and money Careers Technology pop culture politics
Disclaimers

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Before investing, please carefully consider your willingness to take on risk and your financial ability to afford investment losses when deciding how much individual security exposure to have in your investment portfolio.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit www.stashinvest.com/disclosures.