How to make your child a millionaire

Building your own wealth and financial stability is great, but you can use the power of financial literacy and the basic skills of building wealth to help your children acquire those same skills. The best part, you can help them achieve this goal before they’re able to contribute themselves, so that when they’re ready to go into the real world, they have all the tools they need plus an incredible foundation to start their financial journey. 

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It is so incredibly important to steward your children’s financial future while you can, because they are the future of the economy and you want them to be successful financially. The sooner you are able to help your children become financially stable, the better off they will be down the road. So, let’s break down the accounts you need to open and maintain for your children to help them become a millionaire. 

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What is a custodial brokerage account?

Generally speaking, a custodial account is a type of investment account that your child owns, but you manage as the adult, until they turn 18 or 21 depending on state laws, which then they would take over managing their accounts. 

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There are a few different types of custodial accounts, most of which are similar to the non-custodial versions but have specific rules and regulations since they are investment accounts owned by minors. 

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• Roth IRA 
• UGMA / UTMA
• Special needs trust
• 529 educational savings plan

Roth IRA

I’ve talked about a Roth IRA before, but the difference here is that a custodial Roth IRA is an individual tax-advantaged retirement account that’s owned by your child but funded and managed by you, the adult, until your child reaches 18 or 21, and is able to then manage it themselves. 

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What’s the advantage with a custodial Roth IRA account?

When we talked about retirement accounts, I mentioned that you can’t withdraw funds from a retirement account before you’ve reached retirement age without incurring a 10% charge on the money you withdraw. That’s an incredibly long time for kids who are far from retirement age, but with a Roth IRA, the money you contribute to that account can be withdrawn at any time. 

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So, if you start a custodial Roth IRA account for your 11-year-old kid, you could use the money contributed to that when they’re 16 or 17 towards their first car. That being said, there are some caveats to a custodial Roth IRA that will determine whether your child is eligible for one. 

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Requirements for a custodial Roth IRA account 

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While there is no age limit for contributing to a Roth IRA account, there is a stipulation for opening an account. That stipulation being the child has to have earned income. 

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Earned income is defined by the IRS as any form of taxable income and wages, so this could be babysitting, self employment gigs or odd jobs, or when they’re older a W-2 job. So, while you as the parent can contribute to their Roth IRA account, the caveat is that there needs to be at least as much money in their account from earned income for what you’re contributing. If your child only has $300 worth of earned income in a Roth IRA account, you can only contribute $300 - think of it like the employer matching of a 401(k). 

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While we’re talking about contributions, Roth IRAs have contribution limits. In 2024, $7,000 or the total of earned income for the year, whichever is less

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There are requirements and caveats to opening and contributing to a custodial Roth IRA account, it’s still incredibly beneficial, especially because the contributions can be withdrawn and used for more than retirement. 

UGMA / UTMA

The kicker with a UGMA or UTMA is that unlike a Roth IRA, the child doesn’t need to have taxable income or wages, you can open up an account for them under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act. 

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The account will initially be in your name, but once your child turns of legal age, they will automatically take control of the account. An account under UGMA allows parents to give gifts of cash or securities without tax penalties up to certain limits. An account under UTMA allows parents to give gifts of property and other transfers, which is available in all U.S. states besides South Carolina and Vermont. 

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Pros and cons of UGMA and UTMA accounts 

Pros: 

• These accounts offer flexibility 
• They bypass the process of creating a trust for your child, which ends up saving time and money 
• The accounts are easy to set up and maintain 
• There are no contribution limits
• There are no withdrawal penalties or restrictions 

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Cons: 

• You no longer have control once they turn of legal age, the assets in these accounts are automatically theirs
• Irrevocable - you cannot remove or take back contributions or gifts to these accounts
• There are no tax benefits associated with them, and they are a taxable account
• With a UGMA or UTMA there is a reduction in their financial aid eligibility once they apply for college 
• The beneficiary for these accounts is nontransferable 

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With these accounts, there are a few things you may want to consider before opening one for your child, but ultimately, a UGMA or UTMA account is a great investment to start your child on the right path to financial security. 

Special needs trust

If your child has a disability, you may be able to open a special needs trust for them. Essentially, it’s an estate planning tool to receive financial support without affecting other government benefits you’re receiving. 

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The purpose of this trust is to help those with functional needs are given financial support throughout their life. 

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Types of special needs trusts

There are three categories of special needs trust and two major types that are important to note. 

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• First-party trust
• Third-party trust
• Pooled trust

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Standalone trust: is effective immediately and your child can access the fund before you pass. If you’re looking to open a trust for your child in order to continuously support them financially while you’re still here, and allow other family members to contribute, the standalone trust is a great option. 

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Testamentary trust: this trust is created as part of a will or trust and will not be funded until you pass. This type of trust is for if you’re looking to plan for your passing and want to ensure that once you do your inheritance and trust contributions are given to your child, but you don't want them to be able to access those funds immediately. 

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No matter what category or type of trust you choose, the special needs trust can ensure your child is financially taken care of throughout their lifetime and yours. 

529 educational savings plan

When talking about a 529 educational savings plan, it is a tax-advantaged college savings plan that is used for the child’s education expenses. This could be things like books or tuition. It’s the perfect way to help your child further their education, before they’ve even thought about it. 

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Plus, it’s a lot easier to contribute funds this way instead of waiting and trying to contribute to their education once they’ve applied and decided where to go. 

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Types of 529 plans 

There are two types of 529 educational plans, and both are still specific to educational expenses. 

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Standard 529 college savings plan: this plan is the most common and it allows your contributions to grow tax-free and then can be withdrawn tax-free once your child is ready to go to college. It covers expenses like tuition, room and board, and textbooks

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529 prepaid plans: while this plan is less common, it’s still an option for you and your family. The prepaid plan allows you to prepay part or all of an in-state public school tuition. Now, you might be thinking why would this be helpful? Well, the tuition is locked in at the time of payment, so you won’t have to worry about having to pay for tuition changes, because you’ve already prepaid for that set amount. The reason this is less common is because most don’t know where their child will end up for college. 

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Each plan benefits, amounts, and regulations are completely dependent on where you live in the United States. 

High yield savings account

If I’m being honest, if you’re only going to do only one of these things for your children, it should be this one. A high yield savings account is an incredible wealth building tool early on that you can contribute to that will build up interest over time. 

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It works just like any other high yield savings account, except this one would be in your child's name, and you can then add funds to it until they can take it over themselves. 

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What’s the difference between a regular savings account and a high yield savings account? 

The biggest difference is that traditional savings accounts offer little to no interest building over time, so your money is sitting in there stagnant instead of building wealth for you. 

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High yield savings accounts typically have between a 4% and 5% APY, allowing your savings contributions to actually make money for you. 

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Since it’s simply a savings account, there aren't typically any special requirements, like there is for opening a Roth IRA or other investment account you could open for your child. It’s honestly a great first option if you’re unsure and want to start out with something simple. 

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Let’s Recap

It’s so incredibly important to be a steward for your child’s wealth while you can. They can have a solid foundation to financial stability and debt-free living if you can take the time now and start these practices early. 

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Not only does it financially help them early on, but it also is a great way of teaching them money habits that they can take with them. Whether it’s a custodial account or a simple high yield savings account, start investing for them now so they can have a solid financial future. 

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