Starting to invest at age 15 instead of 25 can mean hundreds of thousands more in retirement savings — the power of compound interest is that dramatic over decades. Whether your child is a teen interested in learning to trade or you want to build a nest egg for their future, a custodial investment account is the way to do it.
This guide compares the major options, explains the tax implications, and walks through exactly how to set one up.
Types of Youth Investment Accounts
UGMA/UTMA Custodial Accounts
- Who controls it: Parent/guardian manages until child reaches age of majority
- Age of majority: 18 (UGMA most states), 18-25 (UTMA, varies by state)
- Tax treatment: First $1,300 of investment income is tax-free, next $1,300 taxed at child's rate, above $2,600 taxed at parent's rate ("kiddie tax")
- Transfer: Irrevocable gift — once deposited, the money belongs to the child
- Investment options: Stocks, bonds, ETFs, mutual funds, CDs — anything
Youth Brokerage Accounts (Fidelity Youth, etc.)
- Who controls it: Teen trades independently with parental oversight
- Age requirement: 13-17 (Fidelity Youth)
- Tax treatment: Same as custodial accounts
- Features: Debit card, direct deposit, educational tools
- Limitation: Converts to individual account at 18
529 College Savings Plans
- Purpose: Tax-advantaged education savings only
- Tax treatment: Tax-free growth and withdrawals for qualified education expenses
- FAFSA impact: Counted as parent asset (5.64% assessment rate)
- Flexibility: Can now roll unused funds into Roth IRA (2024 rule change, up to $35,000 lifetime)
Roth IRA for Minors
- Requirement: Child must have earned income (job, babysitting, lawn mowing)
- Contribution limit: Lesser of earned income or $7,000 (2024)
- Tax treatment: Tax-free growth and qualified withdrawals in retirement
- Best for: Teens with part-time jobs
Head-to-Head Comparison: Fidelity vs. Schwab vs. Vanguard
Fidelity Youth Account (Ages 13-17)
- Account fees: $0
- Trading commissions: $0 for stocks and ETFs
- Minimum investment: $0
- Unique features: Teen controls the account, debit card with no fees, parental monitoring dashboard, educational content
- Available investments: Stocks, ETFs, mutual funds (no options, crypto, or penny stocks)
- Parent visibility: Real-time alerts, trade notifications, balance monitoring
- Best for: Teens who want to learn by doing with guardrails
Fidelity UGMA/UTMA Custodial
- Account fees: $0
- Trading commissions: $0 for stocks and ETFs
- Minimum investment: $0
- Features: Full investment universe, parent-managed, auto-transfers to child at age of majority
- Best for: Parents investing on behalf of young children (under 13)
Charles Schwab Custodial Account
- Account fees: $0
- Trading commissions: $0 for stocks and ETFs
- Minimum investment: $0
- Features: Schwab Intelligent Portfolios (robo-advisor) available, large ETF selection, fractional shares
- Best for: Parents who want automated investing (robo-advisor option)
Vanguard UGMA/UTMA
- Account fees: $0 (fee eliminated in 2023)
- Trading commissions: $0 for Vanguard ETFs and mutual funds
- Minimum investment: $0 for ETFs, varies for mutual funds (some $1,000-$3,000)
- Features: Low-cost index funds (industry-leading expense ratios), target-date funds
- Best for: Long-term buy-and-hold index investing
How to Open a Custodial Account (Step by Step)
What You Need:
- Parent's Social Security number and ID
- Child's Social Security number
- Child's date of birth
- Funding source (bank account for transfer)
Fidelity Youth Account:
- Go to fidelity.com/youth-account
- Parent creates or signs into their Fidelity account
- Enter teen's information
- Teen downloads the Fidelity Youth app
- Teen accepts the account and sets up their profile
- Fund the account via transfer or set up recurring deposits
Fidelity/Schwab/Vanguard Custodial:
- Log into your brokerage account (or create one)
- Select "Open a New Account" > "Custodial" or "UGMA/UTMA"
- Enter your information (custodian) and child's information (beneficiary)
- Select your state (determines UGMA vs. UTMA and age of majority)
- Fund the account
- Make initial investments
Investment Strategies for Children
For Ages 0-10 (Long Time Horizon)
- 100% stock index funds: VTI (Total Market), VOO (S&P 500), or FSKAX
- Rationale: With 20+ years to grow, short-term volatility doesn't matter
- Expected long-term return: ~10% average annual (historical S&P 500)
For Ages 11-15
- 80-90% stocks, 10-20% bonds: Add some stability as college approaches
- Consider: Target-date funds that automatically adjust allocation
For Ages 16-17 (If Saving for Near-Term Goals)
- 60% stocks, 40% bonds/cash: More conservative if money needed within 2-5 years
- If for long-term: Stay aggressive — they likely won't need it for decades
Recommended First Investments
| Investment | Ticker | Expense Ratio | What It Is |
|---|---|---|---|
| Vanguard Total Stock Market ETF | VTI | 0.03% | Entire U.S. stock market |
| Vanguard S&P 500 ETF | VOO | 0.03% | 500 largest U.S. companies |
| Fidelity ZERO Total Market | FZROX | 0.00% | U.S. total market (Fidelity only) |
| Schwab U.S. Broad Market ETF | SCHB | 0.03% | U.S. total market |
| Vanguard Total World Stock ETF | VT | 0.07% | Global stocks (U.S. + international) |
Tax Implications to Know
The "Kiddie Tax" (2024 Rules)
- First $1,300 of unearned income (dividends, capital gains): Tax-free
- Next $1,300: Taxed at child's rate (usually 10%)
- Over $2,600: Taxed at parent's marginal rate
Gift Tax Considerations
- Annual gift tax exclusion: $18,000 per parent per child (2024)
- Both parents can gift: $36,000 per child per year without filing
- Above this: counts against lifetime gift/estate tax exemption (currently $13.61 million)
FAFSA Impact
- UGMA/UTMA: Counted as student asset (up to 20% assessed)
- 529 plan: Counted as parent asset (5.64% assessed)
- Roth IRA: Not reported on FAFSA (withdrawals may count as income)
Quick Checklist
- [ ] Decided between custodial (parent-managed) and youth account (teen-managed)
- [ ] Chosen a brokerage based on features needed
- [ ] Gathered required documents (SSN for parent and child)
- [ ] Opened the account online
- [ ] Funded with initial deposit
- [ ] Selected age-appropriate investments
- [ ] Set up automatic contributions (even $25-50/month compounds significantly)
- [ ] Discussed FAFSA implications if college is a goal
Bottom Line
The best time to start investing for your child was at birth. The second best time is now. A $100/month investment in a broad market index fund starting at age 5 could grow to over $100,000 by age 25 at historical market returns. Choose the account type that matches your goals (education-only vs. any purpose), pick a low-cost index fund, set up automatic contributions, and let compound interest do the heavy lifting.
