Youth Investment Accounts and Financial Literacy Opportunity

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• Low- and middle-income families
• Young adults starting out independently
• Individuals and families living paycheck to paycheck
• Renters and homeowners are facing rising housing costs

This is my perspective as a Personal Finance educator interested in expanding opportunities for youth in under-resourced communities. One of the greatest gifts we can provide young people is not simply money, but knowledge and wisdom. Accounts and investments are powerful tools, but they are most effective when accompanied by intentional financial education and family engagement.  My hope is to collaborate with local organizations and help connect families to these opportunities while ensuring students understand how wealth is built and protected. 

 Major Investment Account Options for Youth under 18  

1) 529 Education Savings Plans

• Eligibility
• Available to individuals of any age.
• A beneficiary (student/child) must be designated on the account.
• The account owner does not have to be the child's parent.
• Eligible account owners may include:
• Parents
• Grandparents
• Other relatives
• Family friends
• Guardians or trusted adults
• There are no income restrictions for opening or contributing to a 529 plan.
• Contributions can be made by multiple individuals.
• Lifetime contribution limits vary by state and are generally very high.
• Funds can be used for qualified educational expenses, including:
• College and university expenses
• Trade and vocational schools
• Graduate and professional programs
• Apprenticeship programs
• Up to $10,000 annually for K–12 private school tuition
• The beneficiary can be changed to another eligible family member if circumstances change.
• The account owner maintains control over the funds and distributions; ownership does not automatically transfer to the child at age 18.

Benefits

• Tax-free growth.
• Tax-free qualified withdrawals.

Important Advantage

The child does not automatically gain control of the account.

2) UGMA/UTMA Custodial Accounts

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are designed to allow adults to save and invest on behalf of a child without the cost or complexity of establishing a trust. These accounts provide flexibility and can be used to transfer wealth and teach financial responsibility.

Common Uses

• Building long-term wealth for a child.
• Investing gifts from parents, grandparents, or other family members.
• Saving for future expenses beyond education.
• Teaching children and teenagers about investing and stewardship.
• Providing funds for:
• College expenses
• Starting a business
• Purchasing a vehicle
• Housing expenses
• Travel or other life goals
• Creating a simple alternative to a formal trust.

Features

• No annual contribution limits.
• No lifetime contribution limits.
• Broad investment choices.
• Assets are irrevocable gifts.

Important Consideration

Ownership transfers to the child at the age of majority.

Adults should understand this carefully. Once ownership transfers, the child controls the money. Financial institutions typically notify custodians and may temporarily restrict the account until ownership is formally transferred.

3) Custodial Roth IRA

A Custodial Roth IRA allows a child with earned income to begin investing for retirement and benefit from decades of tax-free growth. It is one of the most powerful tools available for building long-term wealth and teaching financial responsibility at an early age.

Eligibility:

• Available to minors of any age.
• The child must have earned income from employment or self-employment.

Examples of earned income include:

• Summer jobs
• Babysitting
• Lawn care
• Tutoring
• W-2 employment
• Family business work (when properly documented)

Contributions are limited to the lesser of:

• The child's earned income for the year, or
• The annual Roth IRA contribution limit.

Purpose and Benefits

• Encourages long-term investing habits.
• Provides completely tax-free growth and tax-free qualified withdrawals in retirement.
• Offers access to a broad range of investments, including:
  • Stocks
  • Bonds
  • Mutual funds
  • Exchange-traded funds (ETFs)
• Allows decades of compound growth to work in the child's favor.
• Can serve as an excellent teaching tool for financial literacy and wealth building.
• Contributions (but not investment earnings) may generally be withdrawn without taxes or penalties.
• Ownership
• An adult custodian manages the account while the child is a minor.
• In North Carolina, control generally transfers to the child at age 18.
• Once ownership transfers, the young adult assumes responsibility for managing the account.

Educational Note: A Custodial Roth IRA rewards work and delayed gratification. For children and teenagers with earned income, even modest contributions can potentially grow into substantial wealth over time, making it one of the most valuable gifts a family can provide.

Ownership

The child gains control upon reaching the age of majority.

In North Carolina, the age of majority is generally 18 years old.

Families should verify the exact rules with the financial institution holding the account, because transfer procedures vary.

Questions Families Commonly Ask

How do taxes work?

Questions to discuss with a CPA or tax professional:

• How are withdrawals taxed?
• What appears on a tax return?
• Who reports investment income?
• Are there kiddie-tax implications?
• Are there state tax benefits?

When does ownership shift?

For custodial accounts, ownership generally transfers at the age of majority.

Parents and guardians should understand:

Eventually, the money belongs to the child.

Financial Order of Operations (FOO)

Popularized by The Money Guy Show.

Step 1

-Cover insurance deductibles.

Step 2

-Capture employer retirement matches.

Step 3

-Pay off high-interest debt.

Step 4

-Build emergency reserves.

Step 5

-Maximize Roth IRA and HSA contributions.

Step 6

-Maximize employer retirement plans.

Step 7

-Pay off low-interest debt.

Step 8

-Invest toward future goals.

Step 9

-Prepay low-interest mortgage (optional).

Millionaire Mindset

Short-term goals create long-term goals.

On the road to becoming a millionaire, milestones may include:

• Paying off debt.
• Building an emergency fund.
• Maxing out a Roth IRA.
• Increasing retirement contributions.
• Investing consistently.

Every major goal is accomplished through many smaller victories.