Safety tips for kids and investing go together like bread and butter.
Every year, investors are treated to multiple reports detailing the stark losses suffered by grown adults in speculative forex, cryptocurrency, options and day trading.
So just imagine how much trouble a kid could get into if they had full control of the brokerage steering wheel.
Parents who want to teach their children about investing can do well to provide them with real-world experience in a brokerage account or investment app. But without the proper guardrails in place, an inexperienced child could deliver a deluge of financial damage in just a matter of seconds.
Fortunately, there are a few ways to keep your children on trading training wheels until they're properly educated. Read on as we explore three safety tips for kids and investing.
1. Use custodial or other parent-led accounts
The only type of investment account that gives a minor power to make decisions independent of a parent or guardian is the joint brokerage account, which the minor jointly owns. So one way to keep your children from falling into bad habits is to invest through an account that's intended for the child's benefit, but where you ultimately hold the final say on any buys or sells. These include:
- Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) custodial brokerage account
- Custodial individual retirement accounts (IRAs)
- Custodial Roth IRAs
- 529 plans
- Coverdell education savings accounts (ESAs)
"Custodial brokerage accounts are ideal for saving funds that can be used for any eventual purpose," says Riley Adams, a licensed CPA and publisher of family financial education site Young and the Invested. "Parents trying to teach their children to invest while saving for their college education, however, might consider 529s. Funds are allowed to grow tax-free, and no taxes are taken out for withdrawals used to fund qualified education expenses."
And as of 2024, 529s will offer another perk:
"The Secure Act 2.0 really eliminated the big boogeyman for 529s: If my kid doesn't use all the funds, what do I do with it?" says Mike Ramirez, manager of financial planning and certified college planning specialist at EP Wealth Advisors' San Diego office. "The old answer: You can re-designate the beneficiary as a sibling or someone else. But starting in 2024, you can use excess funds from the 529 in the beneficiary's Roth IRA."
"That makes a 529 much more compelling to parents, to savers."
2. Use an investing app with guardrails
Your average joint brokerage account doesn't offer much in the way of controls to keep your child from the most aggressive of investments. But several investing apps designed for teens offer a variety of reins should parents want them:
- The Fidelity Youth Account, for instance, limits investments to most U.S. stocks, ETFs and Fidelity mutual funds. Penny stocks are prohibited, as are other more speculative investments such as cryptocurrencies and foreign exchange.
- Bloom – which restricts trading to U.S. stocks, ETFs and a tiny handful of cryptocurrencies – offers several tight controls. Parents can require their manual approval for any trades, regulate which stocks their teens can invest on based upon risk, and even keep deposits from hitting the account until their teen has finished selected financial literacy courses.
- Greenlight, a debit card designed specifically for teens that also features investing capabilities, only allows U.S. stock and ETF trading. It also provides parents with real-time notifications when their child is trying to make a trade, and the trade won't execute without the parent's approval.
3. Make sure your child's account has SIPC insurance
The past months' spate of bank failures has brought Federal Deposit Insurance Corporation (FDIC) insurance, and its protection of savings and other bank deposits, back into the spotlight.
Less known is that similar insurance exists for investment accounts.
Many brokerage firms offer Securities Investor Protection Corporation (SIPC) insurance for up to $500,000 in securities (and $250,000 in uninvested cash). This isn't protection from failed investments – caveat emptor, your choices are your own – but it will make you whole in the event your broker becomes insolvent.
