$1 invested now can turn into $20, $50, or even $150 over time. That's why compound interest is sometimes called an overlooked world wonder. To really see all the magic of compounding, you want to start investing early. One way to do that is to open a custodial brokerage account with Vanguard for your kids!
Follow these steps to open an account with Vanguard that can set your family up for a lifetime of financial success.
How to Open a Custodial Brokerage Account with Vanguard
Perhaps you already have an account with Vanguard. Or maybe you've heard someone sing their praises. No matter how you've made the decision to open a custodial brokerage account with them, rest assured that it's a simple process.
Use these 8 steps to open your Vanguard custodial brokerage account today!
Step 1 – Make Sure You Understand How They Work
Before you dive into the steps of opening a new account, you want to make sure that you're clear on how they work. This custodial brokerage is a type of UTMA or UGMA. That means that it is an irrevocable gift that the minor will get full control of when they become an adult.
Let's put that another way. This account can help them grow their money as a child and a teen. Then, they can use it as a springboard into adulthood–however they see fit.
If you need more details, check out the information provided on the Vanguard site.
Step 2 – Click Open an Account
Once you’re sure you want to open a custodial brokerage account with Vanguard, head to their website.
From there, you can click the Open an Account button. If you already have a Roth IRA or another account with Vanguard, you will recognize the account setup wizard that walks you through the next steps.
Most people who want to open a custodial brokerage account with Vanguard will choose the first option to Open a New Account With Money From My Bank. However, you should review all the options listed. Then, pick the one that best fits your situation.
Step 3 – Select the Education or General Investing for A Minor Option
Next, you will see several account type options. Make sure you select the option that says Education or General Investing for a Minor.
This broad category basically lets Vanguard know you are opening this account on behalf of someone else.
Step 4 – Choose General Investing Brokerage For a Minor
Then, you will see two options: 529 or General Investing. Select the option called General Investing Brokerage for a Minor.
In doing this, you are clarifying for Vanguard that you understand this custodial account is for general investing and the child will be able to use the funds for anything they like once they become a legal adult.
Step 5 – Enter Information for the Custodian and Minor
The custodian is the adult in charge of managing the account until the minor becomes an adult. To start this account, the custodian needs to give their legal name, Social Security number, birthdate, citizenship status, and contact information.
Next, Vanguard prompts you to enter information for the minor. You will give their name, birthdate, Social Security number, and citizenship status.
Finally, you will select the state where the custodian or minor resides. Once the account is opened, this cannot be changed. After selecting the state, you will see the default age of transfer. For example, when I select Michigan, it reminds me that 18 is the age of transfer. This is the age when the minor gets full control of the money in the account.
Step 6 – Fund the Account
After the account is set up with both a custodian and a minor, it’s time to fund it! That means you’re moving money from a bank or another account. This money is then used to invest (in the next step!).
Step 7 – Buy Investments
Just like your 401k or Roth IRA, this brokerage is an investment vehicle. If we say it another way, that means that this brokerage account holds your investments. The account itself isn’t an investment. That’s why this step is so important.
After you add funds to your account, it’s important to make sure that you are buying investments with them. Otherwise, the money in the investment vehicle stays parked, missing out on months, years, or even decades of growth.
Step 8 – Name a Successor
You also have to identify a successor custodian. If something happens to you before the child becomes an adult, you want the account to be managed. So this step identifies the adult who will step up in your place should there ever be a need.
Frequently Asked Questions About Opening a Custodial Brokerage Account with Vanguard
Before you open a custodial account with Vanguard, let’s explore some of the most commonly asked questions about these unique (and powerful!) accounts.
Are custodial brokerage accounts a good idea?
Custodial brokerage accounts can be a great teaching tool for families looking to build financial literacy and generational wealth.
But there are some drawbacks to them too. Custodial brokerage accounts can make it more challenging to secure financial aid for college. That’s because the money in those accounts is viewed as the child’s asset.
Another consideration is that these are irrevocable. That means that when your child or teen becomes an adult, the money belongs to them–no strings attached.
What is the best way to invest for a child?
There are many ways to invest for a child. Custodial brokerages can be helpful, as can Roth IRAs (once your child has earned income).
However, you may also want to consider 529 plans, especially with the added flexibility of these college savings plans from the Secure 2.0 Act. Section 126 of this plan allows for some unused funds from a 529 to be rolled over into a Roth IRA.
For more insight, check out our podcast episode on the best way to invest for your child’s future.
However you decide to invest, you also want to consider fees. With any type of investing, high fees can really take a bite of your money.
The final consideration to make is if you and your partner already have your financial footing. Many times, parents start to invest for their children before taking care of their retirement. Those are the best of intentions, but they can also spell disaster later on. Remember that student loans exist; retirement loans do not.
Are a UTMA and a custodial brokerage account the same thing?
UTMA accounts and custodial accounts are essentially the same thing. However, a UTMA account and a custodial brokerage account don’t have to be the same thing!
When we talk about a brokerage account, that’s generally money that is meant to be invested. Typically, brokerage accounts hold ETFs, mutual funds, stocks, or bonds. The money is invested through a licensed broker, which is where the term brokerage comes from.
However, families can also open UTMA accounts which are savings accounts. Unlike brokerage accounts, these savings accounts focus on saving, not investing. Plus, they can be opened with virtually any financial institution. You can also open a UTMA checking account.
Final Thoughts on How to Open a Custodial Brokerage Account with Vanguard
It's really important to help your child invest if and when you're able. There are many ways to do this depending on a variety of factors.
If you decide that a custodial brokerage account is the right choice for your family, you can rely on Vanguard to make opening the account simple and straightforward.
Would you ever open a custodial brokerage account? How are you helping your kids build their financial literacy?
Please let us know in the comments below.
Yes I did open a custodial brokerage account for my oldest son and it was such a great decision. We started teaching him about money by playing store and advancing to monopoly.