Written by Miranda Marquit on October 1, 2012 in Family Money  |   No comments

One of the best ways to build wealth over time is to invest. Many parents know this truth, but unfortunately they do little when it comes to teaching their children about investing.

While you want to help your child learn about saving money and making smart spending choices, don’t forget to help him or her also learn about building wealth with the help of well-chosen investments.

Setting up an investment account for your child

Many brokers allow you to set up an investment account on behalf of your child. Children can’t have their own investment accounts, so you will have to be the one actually buying and selling investments on your child’s behalf. You essentially have two choices when you set up your child’s investment account: a guardian account or a custodial account.

1. When you use a guardian account, you retain ownership of the account. However, since the money is considered yours, the gains are taxed at your rate.
2. A custodial account is one that the child owns directly and that is taxed at the child’s rate. You, the adult, are just taking care of it until your child reaches the age of majority for the purposes of the account. In some states, your child gains control at age 18, and in others, your child must wait until he or she turns 21. Once your child comes of age, all of the assets will be under direct control.

Before you begin the process of opening an investment account on behalf of your child, be sure to double-check with the brokerage to determine what documentation you will need to provide.

Note that it is also possible to help your child open an IRA if he or she has a source of earned income. This can be a great way to give your child a head start on retirement planning.

Talking to your child about investing

Once you have opened an investment account for your child, the next step is to add money and buy investments. Some parents just add stocks, bonds, or funds to the account and consider their work done. I think it’s a good idea to actually talk to your child about investing and to encourage him or her to take a more active role in the process.

Young children might not be old enough for an in-depth conversation about investing. However, as your child moves into the teen years, you can start to talk about different companies and funds. You can also talk about the costs of investing and educate your child on how investments work. Be sure to look over the pros and cons of different investments so that your child can learn to think critically.

There are a number of online tools and investing games that can help your child practice investing skills and gain a little knowledge before making decisions that might actually matter. Let your child try some of these sites before you begin creating a more involved investing strategy with real money.

It’s even possible to let your child make some mistakes—and to turn them into opportunities for learning. However, remember that you are still the parent and that you are ultimately responsible for your child’s wellbeing. You are still in charge of the account, and you should step in if your child wants to invest in something disastrous.

As your child’s account grows, let him or her see the results as encouragement to continue to invest. Investing is a great habit for your child to start, and it is one that can have positive effects for life.

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