Teaching your children about saving, making and investing money is probably the most important thing you can do for them apart from being their parent. Did you know that teaching your kids about investing just got a bit easier with a Robinhood custodial account? If Robinhood is not for you, then have you heard of ‘Loved: investment for kids‘? If not, read on!
Generally you have to be 18 to open an account and invest, and fair enough. Investing is a serious business and you can lose a lot of dough. A custodial account, however, is a financial product that you can access in the US and is designed to allow adults to make investments on behalf of minors.
A supervised custodial account can be a tool to teach your kids about investing and create a nest egg for their future financial freedom. Why not start early and give your kids the gift of a life they love!
With new platforms like Robinhood and Loved the process of purchasing securities is simpler. Investing has therefore become easier to understand for younger investors.
This post will teach you what a Loved or a Robinhood custodial account is, why you might consider one, and how set one up for your kids!
What is Robinhood?
Robinhood is an fintech app that allows anyone over 18 to buy stocks, ETFs and options. They advertise as an investment platform that doesn’t require you to pay commissions (they make money in other fees however).
What is Loved?
Loved is an investing platform where families can create an investment portfolio together. Loved bills itself as ‘an app that offers stocks for kids’.
Both apps offer investing for under 18s through a vehicle called a ‘custodial account’. Let’s look at what these are and how you can use them.
What is a custodial account?
A custodian account is type of investment account that an adult can open on behalf of a minor, usually their child or grandchild.
Who is a custodial account for?
A custodial account is for investors under the age of 18. For example, teenagers who want to learn about investing with the supervision of a custodian – normally their parent.
Robinhood and Loved allow under 18s to start investing with as little as $1 to $5 in their account. Minors cannot withdraw or deposit money themselves until they turn 18 years old (or the legal age in your state).
A custodial account is also for parents or grandparents who want to invest on behalf of their children on grandchildren, in the child’s name.
Who is the ‘account custodian’ and what do they do?
A custodian is the adult who sets up, deposits into and manages a minor’s account. The custodian is responsible for managing the assets in the account until the account holder reaches adulthood or turns 18.
Who owns the assets in the account?
Once a deposit is made into a Robinhood custodial account, the money belongs to the account holder (the child) and cannot be withdrawn from the account (unless certain circumstances apply).
This type of Robinhood account is a long term investment vehicle. Any investments left need to be left in the account it until control passes to the minor at legal age. Once control does pass, the account holder has free reign over what they decide to do with the assets in the account.
Loved on the other hand allows the custodian to withdraw flexibly from the account, which makes it less a permanent investment. Minors can also have their own account login, but are not able to deposit, withdraw, buy or sell from that login.
What are the types of custodian accounts?
- An UGMA account: The user can put cash, securities (financial items you can invest in, such as stocks and bonds), and insurance policies into this type of account.
- The Uniform Transfer to Minors Act (UTMA) Account: An account called a UTMA account allows the user to put any type of investment into it. You can contribute cash and securities in these accounts, much like UGMA accounts. You may even deposit real estate in these accounts.
The state you live in will likely determine which type of account you have access to.
What are the advantages of a custodial account?
Custodial accounts can be a tax advantaged way to teach your child about investing. The tax rates on the Robinhood custodial account are as follows:
- no taxes on the first $1,050 of income.
- The next $1,050 is taxed at the child’s tax rate.
- Any amount of income over $2,100 is taxed at the rate of the adult custodian.
We’re not saying it’s the best tax advantaged investment vehicle for children. A 529 Plan is better for tax purposes. But 529 Plans are also complex and your can’t do them together with your kids. The Loved and Robinhood platforms can be an engaging way to learn for younger investors and therefore a potential teaching tool.
Why set up a custodian account for your children?
To teach your kids about money and investing, and to create a nest egg they can use later in life!
Did you know that investing just $5 a week when your child is born gives them $11,351 when they turn 18? You initial investment would be just $4,420. You will have doubled your money at just 9% interest, compounding. 9% is the average US stock market return over 120 years.
A Robinhood custodian account can also be a way to help children understand the concept of investing and give them exposure to different assets like stocks and cryptocurrency. It can help teach about taxes and fees involved in trading and holding stocks, ETFs and options.
This is what Robinhood says on their website about custodial accounts:
“Robin Hood makes it easy for anyone to trade stocks, options, and digital currency without fees. This account is designed specifically for children who are under 18 years old to encourage financial literacy through investing in the stock market.”
We think early financial literacy is vital for children. The Robinhood app may just spin enough magic around the dry topic of investing to keep kids interested. If you’re using Robinhood as a teaching tool however, it’s a good idea to supervise all use of the account.
Loved puts an even greater focus on early start financial literacy than Robinhood. If you’re looking for help with tools and resources to teach your children about money and investing, then Loved is the better option. The Loved ‘Learn’ page on their website has tonnes of ideas on how to teach kids about money and investing.
How do you set up a custodial account?
With Loved, setting up your custodial account is very simple and all happens online. There’s literally a 3 step sign up process. You download the app, input and validate identities, and create profiles for the custodian and child. You do need to be a US citizen or permanent resident and you’ll have to provide your social security number.
Robinhood’s process is less far clear.
From what we could find online, a Robinhood Custodian Account Application is a paper-based process. We couldn’t find the application forms to download from the internet. This is consistent with what plenty of users say about Robinhood – customer support is lacking.
For this reason, and because the resources are better, we prefer the Loved app if you’re keen on teaching your kids investing “by doing’.
Things to know before you get started
Both platforms advertise as being commission free and with no brokerage fees to trade or app subscriptions charges. The thing is, both have to make money somehow. It’s usually through their fees. Of the two services, Robinhood is more transparent on their website about what their fees are. We couldn’t find anything about Loved. All we are saying here, is get in the know about fees before you sign up!
