A savings account teaches safety and goals. An investment account teaches long-term growth and patience. Most families introduce investing after basic budgeting, not as a first step.
For minors, investing happens in a custodial account. You manage it until the child reaches adulthood in your state. The money is legally theirs, which has tax and control implications.
Custodial brokerage accounts (UGMA/UTMA)
Open a custodial account at a major brokerage (Fidelity, Schwab, Vanguard, and others offer them). UGMA and UTMA are two custodial structures; the broker picks based on your state.
You can buy index funds, ETFs, or individual stocks. For most families, a broad stock index fund or balanced fund is enough. Keep it boring.
At the age of majority (often 18 or 21), the child takes full control. They can cash out, keep investing, or spend it. Plan conversations years before that date.
How this differs from 529 and Roth
529 plans are for qualified education costs with tax-free growth for that purpose. Custodial brokerage money can pay for anything once the child owns it.
A custodial Roth IRA requires earned income and has annual contribution limits, but withdrawals in retirement can be tax-free. Many parents use both: Roth for the teen's job income, custodial brokerage for gifts and long-term wealth.
Do not skip your own retirement to max out a child's brokerage account. Kids have time; you may not.
Taxes on kids' investment income
Interest, dividends, and capital gains in a custodial account may be taxed to the child or parent depending on amounts. The kiddie tax rules apply to unearned income above certain thresholds for children under 19 (or 24 if a full-time student).
Selling investments triggers capital gains tax if the investment rose in value. Frequent trading creates tax paperwork and teaches the wrong lesson.
This is general education, not tax advice. A CPA can help if gift money or gains are large.
A simple way to start
Fund the account with money you are comfortable the child will eventually own: birthday gifts, matched savings, or a portion of earnings.
Choose one diversified fund. Explain that the balance will go down some years. That is normal.
Review the statement together quarterly. Use the compound growth calculator to show what monthly additions could look like over 10 or 20 years.
Next steps
If your teen has W-2 or documented earned income, also read the guide on opening a Roth IRA for kids. Roth and custodial brokerage solve different problems, and both can coexist.