Best Investment for Kids

It’s easier to set a child up for long-term financial success if you choose investments early and manage them with clear goals. Parents and guardians can combine simple, low-risk accounts with long-term growth assets, tax-advantaged plans, and even investments in skills that pay off for years to come. The best choice depends on how long the adults want to keep control, how much risk they are willing to take, how much they are willing to pay in fees and taxes, and how long they want to wait. We’ll discuss 12 beginner-friendly options, their pros and cons, and how to make a sensible plan. Expect clear definitions, tax notes in plain English, and checklists to help new investors get started with confidence.

Investments For Kids At A Glance

Use this table to quickly compare control, liquidity, typical costs, risks, and common use cases.

Notes

• Age of majority varies by state. Many states set it at 18 or 21.
• Returns are not guaranteed. Market-linked investments rise and fall in value.
• P2P lending is not FDIC insured and can result in loss of principal.

How To Choose The Right Investment For A Child

1. Goal and time horizon

• Short term (0 to 3 years): prioritize safety and liquidity (high-yield savings, savings bonds).
• Medium term (3 to 10 years): balanced risk (index funds in a custodial account, 529 for expected education).
• Long term (10+ years): growth focus (index funds/ETFs, Roth IRA when eligible, dividend stocks).

2. Taxes and accounts

• 529 plans offer federal tax-free growth and tax-free withdrawals for qualified education expenses. Some states offer state tax deductions or credits on contributions.
• Custodial accounts are subject to the kiddie tax rules for unearned income above certain thresholds.
• Custodial Roth IRA contributions require the child to have earned income.

3. Fees and simplicity

• Prefer low-cost, broadly diversified index funds and ETFs for core holdings.
• Avoid unnecessary subscriptions and high expense ratios.

4. Control and access

• Decide whether the child should receive full control at the age of majority (UGMA/UTMA), or whether distribution should be controlled through a trust.

1) Custodial Brokerage Accounts (UGMA/UTMA)

An adult custodian manages investments for a minor. Assets transfer to the child at the age of majority.

Pros

• Teaches investing fundamentals with real assets.
• Flexible use of funds for any benefit to the child.
• Broad investment menu (stocks, ETFs, bonds, cash).

Cons and cautions

• Assets become the child’s at transfer; cannot be taken back.
• Subject to kiddie tax rules on unearned income.
• Market volatility may be stressful for beginners.

Best for: Families seeking hands-on education and flexibility beyond education-only expenses.

2) Low-Cost Index Funds and ETFs

Funds that track broad market indexes such as total U.S. market or S&P 500.

Pros

• Diversified exposure in a single fund.
• Extremely low fees compared with active funds.
• Simple, long-term strategy suitable for beginners.

Cons and cautions

• Market downturns can be significant.
• Requires patient, long-term mindset.

Best for: Core long-term holdings in custodial brokerage or Roth IRA accounts.

3) 529 College Savings Plans

A plan that helps pay for school with tax breaks. Earnings grow without being taxed, and qualified withdrawals are also tax-free at the federal level. Many plans have age-based portfolios that lower risk as college gets closer.

Pros

• Tax advantages can be substantial over time.
• High contribution ceilings.
• Can be used at most accredited U.S. institutions and many abroad; some K-12 tuition uses may be allowed up to limits.

Cons and cautions

• Non-qualified withdrawals face income tax on earnings plus a 10 percent penalty on those earnings.
• Investment options are limited to the plan lineup.

Best for: Families with a high likelihood of education expenses who value tax benefits.

4) U.S. Savings Bonds (Series EE and I)

Government-backed bonds purchased electronically via TreasuryDirect.

• EE Bonds: Fixed rate, guaranteed to double in value if held 20 years.
• I Bonds: Interest adjusts with inflation.

Pros

• Very low default risk.
• Potential federal tax advantages when used for qualified education expenses (subject to income limits).
• Low minimums make gifting easy.

Cons and cautions

• Must be held at least 12 months; redeeming before 5 years forfeits 3 months of interest.
• Over long periods, returns may lag equities.

Best for: Safe savings, gifts from relatives, and inflation protection with I Bonds.

5) Micro-Investing Apps Designed For Kids

App-based investing with very small amounts and parental oversight.

Pros

• Encourages consistent saving habits with round-ups and auto-deposits.
• Built-in lessons and dashboards make concepts accessible.
• Low dollar entry points.

Cons and cautions

• Some apps add monthly fees that can dwarf small balances.
• Investment options and flexibility may be limited.

Best for: Families focused on habit formation and simple user experiences.

6) Dividend-Paying Stocks

Shares of companies that distribute part of profits as dividends.

Pros

• Demonstrates passive income and compounding through reinvestment.
• Encourages research into business quality and payout sustainability.

Cons and cautions

• Stock prices and dividends can be cut, paused, or canceled.
• Concentration risk if holdings are not diversified.

Best for: Supplementing a core index strategy with a small, educational allocation.

7) Custodial Roth IRA (Child Must Have Earned Income)

A Roth IRA can be opened for a minor who has made money from legal work, like tutoring, refereeing, or mowing lawns. People put in money after taxes, and when they retire, they can take money out tax-free.

Pros

• Decades of tax-free compounding potential.
• Flexible withdrawal rules for contributions (not earnings) if needed later.

Cons and cautions

• Annual contribution cap applies and cannot exceed the child’s earned income for the year.
• Money is intended for retirement; early access to earnings is restricted.

Best for: Teens with part-time jobs who can save a portion of paychecks.

8) High-Yield Savings Account

An FDIC or NCUA insured savings account with a competitive annual percentage yield (APY).

Pros

• Very liquid and low risk.
• Great for short-term goals or an emergency buffer.
• Clear, predictable interest accrual.

Cons and cautions

• APYs change over time; real returns may lag inflation.
• No market growth upside.

Best for: Near-term goals and a starter account to learn deposits, interest, and goal tracking.

9) Courses and Hobbies (Investing In Skills)

Spending on structured learning (coding, writing, music, sports) and resources that build durable skills.

Pros

• Improves problem-solving, discipline, and confidence.
• Can increase future earning power and academic opportunities.

Cons and cautions

• Requires time, consistency, and supervision.
• Costs can accumulate; weigh benefits against budget.

Best for: Long-term human capital development alongside financial accounts.

10) Fractional Shares

Buying a portion of a share in a company or ETF with a small dollar amount.

Pros

• Makes high-priced stocks accessible.
• Supports diversification even with small contributions.

Cons and cautions

• Broker features vary; not all offer full voting rights on fractional positions.
• Standard market risk applies.

Best for: Small, regular contributions and early diversification.

11) Trust Funds

A legal structure where a trustee manages assets for a beneficiary according to instructions in the trust document.

Pros

• Controls how and when a child accesses money.
• Can offer protections from misuse and certain creditors.
• Allows professional management.

Cons and cautions

• Legal setup and ongoing administration costs.
• Requires careful drafting with an attorney.

Best for: Larger estates or families who want structured, conditional access to assets.

12) Peer-to-Peer Lending (Advanced and Cautious)

Platforms that match investors with borrowers.

Pros

• Teaches credit assessment and diversification concepts.
• Potentially higher yields than savings accounts.

Cons and cautions

• Risk of borrower default and platform risk.
• Not FDIC insured; losses are possible.
• Often unsuitable for minors; adult ownership and careful oversight are essential.

Best for: Advanced investors seeking a small, educational allocation after core needs are met.

Costs and Fees: What New Investors Should Watch

• Expense ratios: Prefer low-cost index funds and ETFs.
• Advisory or app fees: Subscription or wrap fees can overwhelm small balances.
• Trading costs: Most brokers offer $0 commissions on U.S. stocks and ETFs, but spreads still exist.
• Account-level fees: Check for custodial or maintenance fees.
• Legal costs: Trusts require attorney fees and potential ongoing trustee fees.

Taxes: Plain-English Notes

• 529 plans: Earnings and qualified withdrawals are tax-free federally; state benefits vary. Non-qualified withdrawals incur income tax on earnings plus a 10 percent penalty on earnings.
• Custodial accounts: Unearned income (dividends, interest, capital gains) may be subject to kiddie tax rules above thresholds.
• Roth IRA: Contributions are not deductible; qualified withdrawals in retirement are tax-free. Early withdrawals of earnings may face taxes and penalties.
• Savings bonds: Federal tax applies on redemption; interest is exempt from state and local tax. Education exclusions may apply subject to income and other rules.

Getting Started: A Simple, Sensible Framework

Starter checklist

• Define the goal and time horizon.
• Pick a core vehicle: 529 for education or custodial brokerage for general goals.
• Choose one low-cost, diversified index fund or age-based portfolio (for 529).
• Automate contributions monthly.
• Add a high-yield savings account for near-term goals.
• Layer educational elements: fractional shares for companies the child recognizes, and a simple dividend reinvestment plan.
• Revisit annually to rebalance and update goals.

Sample monthly plan (illustrative only)

• 60% to low-cost index fund in a custodial brokerage or 529 plan
• 20% to high-yield savings for short-term goals
• 10% to fractional shares for education and engagement
• 10% to skills (courses, books, equipment)

Conclusion

Simple accounts, low costs, patient compounding, and steady habits are the best ways to set up a child’s financial future. High-yield savings accounts help you reach short-term goals, 529 plans give you big tax breaks for school, and low-cost index funds make it easy to grow your money over time. Custodial brokerage accounts and fractional shares let you learn by doing, and a custodial Roth IRA can turn your first paychecks into tax-free growth for decades. Trusts and other advanced tools give you more control when you need it, and investments that teach you skills build human capital that will help you make good financial decisions later in life. Set clear goals, automate contributions, review them once a year, and keep costs down. When the child is ready to take the lead, small, steady steps today can turn into big chances.

Frequently Asked Questions

What is the difference between UGMA and UTMA?

UGMA usually includes money and other financial assets like stocks and bonds. UTMA can hold more than just cash and stocks. It can also hold real estate. Both give the child control over the money when they reach the age of majority set by state law.

What counts as earned income for a child’s Roth IRA?

W-2 wages or properly documented self-employment (like tutoring or lawn care) are examples of earned income. Gifts and allowances that don’t require work don’t count.

What if a child does not go to college after building a 529 plan?

Under certain conditions and yearly limits set by current rules, the money can be used for other qualified education, given to certain family members, or changed into a Roth IRA for the beneficiary. Taxes on earnings and a penalty on earnings apply to non-qualified withdrawals.

Are dividends guaranteed?

No. Dividends can be raised, lowered, or stopped at any time by companies. Reinvesting and spreading out your investments can help you manage risk, but your principal and income can change.

How much is needed to start?

There are no minimum account balances at many brokerages. Fractional shares and micro-investing apps often let you start with just a few dollars. You can buy savings bonds in small amounts. Starting small and automating is the best way to go.

Will investing affect future financial aid?

Yes, maybe. Assets that belong to a student may be treated differently than assets that belong to a parent. In some aid formulas, 529 plans owned by parents are often looked at more favorably than custodial accounts.

Are P2P loans safe for kids?

P2P loans are not insured by the FDIC and come with the risk of the borrower defaulting and the platform failing. After basic needs are met, they are usually better as a small, advanced allocation with adult supervision.

What should be the first account for a young child?

A high-yield savings account is an easy way to start saving for short-term goals and building good habits. A 529 plan for education or a custodial brokerage account for general goals is a common next step for long-term growth.

Written by Kevin Lee Updated August 13, 2025 by Albert Fang