CNBC Explained Why It’s Important to Explain the Rules of Investment Accounts to Children
Children for whom relatives or parents have opened investment accounts should be taught from an early age about the purpose of these funds, the rules for using them, and any applicable taxes. This can help prevent a situation where, upon reaching adulthood, the money is perceived as a windfall, writes CNBC, citing financial experts.
The publication cites the example of an author whose fiancé, at age 30, learned about a portfolio of Coca-Cola shares. His grandparents had opened an investment account shortly after his birth, and legally, control of the account passed to him at age 18. The man’s parents explained that they had simply forgotten to tell him about the account.
In the U.S., UGMA or UTMA custodial accounts are traditionally used for investing on behalf of a child. These accounts legally belong to the child but are transferred to the child’s control between the ages of 18 and 25, depending on the state. After that, the owner can spend the funds for any purpose. At the same time, profits from the sale of assets are taxable: if the investment has appreciated in value, a capital gains tax may apply upon its sale.
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CNBC also describes “Trump Accounts,” which were established under the One Big Beautiful Bill Act. Adults can contribute up to $5,000 per year to such an account for each child. At age 18, the account holder gains control of the account, which is essentially a traditional IRA. Early withdrawals before the age of 59 years and six months—with the exception of, among other things, education expenses and certain housing-related expenses—are subject to income tax and a 10 percent penalty.
Certified Financial Planner John Lepp noted that some 18-year-olds may not be ready to manage a significant lump sum. According to him, basic financial skills should include the ability to spend less than you earn, set aside the surplus, and invest it in assets that can grow.
Experts also advise explaining compound interest to children and linking investments to short- and long-term goals. According to Morningstar’s estimates, the owner of a Trump Account who has received annual contributions of $1,000 since birth will have over $50,000 in the account by age 18. If they do not make additional contributions as an adult, the balance could reach $850,000 by age 55, Morningstar predicts.
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