There’s no shortage of financial pitfalls awaiting your child when they leave the nest.
Having no work experience, no credit history and a pile of student loan debt are just a few of the financial challenges that often plague young adults.
Developing a mature financial mindset early on can prepare your kid to make their own money moves without having to constantly run to the First Bank of Mom and Dad.
And a major piece of your kid’s financial puzzle is setting up a minor trading account.
A key factor to successful investing is having a long time horizon.
The more time you have to invest, the more time compound interest has to work its magic.
Time is money… and when guided properly, kids are loaded.
Also known as a custodial brokerage account, setting up a minor trading account is a breeze.
First, you need to determine which type of custodial account is appropriate. Whether or not your minor has taxable income and wages is the determining factor here.
Thanks to the Uniform Gift to Minors Act or Uniform Transfer to Minors Act, you can still open the account if your mini-me is too young to have a job. Depending on your state’s laws, your child can take legal control of the account at the age of 18 or 21.
But if your teen is a go-getter — whether they’re slinging burgers or bagging groceries — it’s still taxable income.
If this is the case, you can help them open their own custodial IRA.
In fact, a Roth IRA is the gold standard for getting your child to the head of the class.
Their contributions will grow tax-free. Also, withdrawals can be made at any time and can be used for early milestones like college tuition, purchasing a first home, or a vehicle.
Next, you’ll need to choose your broker.
If you already have a broker that you’re comfortable with, feel free to open your minor’s trading account there.
However, make sure that the account has no minimum initial deposit and no account maintenance fees.
Also, for our strategy here, you’ll be teaching your kid how to grow their account by trading stocks, so make sure that the brokerage offers zero or very small commission fees.
If you don’t already have a preferred brokerage, you have more than enough options. All of the usual suspects like E*Trade, TD Ameritrade, Edward Jones, etc. have custodial accounts.
After that, you’ll open and fund the account. You’ll need to gather you and your child’s info ahead of time. Both of your Social Security numbers, birthdates, contact info, and employment info are standard.
You’ll also need to link a valid bank account in order to fund the custodial account.
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Setting up a minor trade account for your child is a relatively simple task, but the long term impact on your legacy can be priceless.