Investment Accounts for Kids

In this podcast, Motley Fool personal finance expert Robert Brokamp discusses the pros and cons of five of the most common options, including the new Trump accounts.

Also in this episode:

• International stocks are off to a stellar start in 2026, outperforming U.S. stocks by the biggest margin since 1995.
• The data center build-out to support the AI arms race is driving up electricity prices and may have the same impact on home prices.
• A recent report identified three criteria that tend to make a stock market downturn more likely.
• Include your pet in your estate plan to ensure she or he goes to the caring home of your choice (and not a shelter), and set aside money for expenses.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.

A full transcript is below.

This podcast was recorded on Feb. 21, 2026.

Robert Brokamp: Investment accounts for kids and international stocks are off to a stellar start. That and more on this Saturday Personal Finance edition of Motley Fool Money. I'm Robert Brokamp, this week, I'm going to lay out the pros and cons of five types of accounts to consider when looking for an investment account for your kids, grandkids, or other youngins in your life, but first, let's look at some news items from this past week. Last year, international stocks returned 32% their best year since 2009. Also, their outperformance relative to the S&P 500, which returned 18% was the largest margin since 1993. Well, this year looks to be continuing that trend. International stocks have returned more than 9% so far in 2026, as of the taping on the morning of February 19th, compared to just 0.6% for the S&P 500. According to Ben Carlson of Ritholtz Wealth Management, this is the best start of the year in terms of international outperformance over US stocks since 1995. One explanation is the drop in the US dollar, which is down approximately 10% since the beginning of 2025, but international stocks are also cheaper, and that's still the case despite the recent outperformance. According to Torsten Slock of Apollo Global Management, the forward P/E of the S&P 500 is 40% above the forward P/E for the MSCI World ex US Index. Turning to our next item on February 13th, the Bureau of Labor Statistics announced that inflation in January was 2.4% down from 2.7% in December, but if you looked at your electricity bill recently, you may not feel that prices are declining. The cost of electricity rose almost 7% in 2025, and a report from Goldman Sachs says that US families shouldn't expect any near-term relief thanks to AI data centers rapidly boosting demand while power supply expands slowly.

According to the report, data centers account for 40% of the electricity demand growth, and we should expect electricity prices to climb another 6% through 2027, though impacts will vary by region. Unfortunately, electricity isn't the only item that is costing more due to data centers. According to a recent Wall Street Journal article, tech giants chasing AI infrastructure are outbidding homebuilders for land, potentially worsening an already severe housing shortage. This building boom is also driving up competition for materials and labor. The journal article quoted Neil Kobel, a homebuilder in Georgia, who said he's having trouble finding skilled workers, and quote, "When you're competing with Amazon, they're going to put more wire in one building than in all the houses I've ever built in my lifetime." End of quote. Now the number of the week, which is 5.2 years. That is how often on average the US stock market drops 20% or more, and it drops 30% or more every 8.9 years on average, according to a recent report from Henry Neville of Man Group. The report looked at 59 previous market peaks and found that three things make a drawdown more likely a lack of volatility, inflation that is too high or too low and expensive valuations. The current market meets two of those criteria, especially that last one. Up next, which account to choose if you want to teach your kids about investing when Motley Fool Money continues.

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Robert Brokamp: As a parent, grandparent or well, mating adult, one of the most powerful gifts you can give a child is a head start on building wealth. Beginning early allows the magic of compound growth to work its wonders over decades. Plus, it gives you the opportunity to teach the next generation all about the ups and downs of investing in real time. However, choosing the right account for a kid can be surprisingly complex with each option offering distinct advantages and trade offs. For this episode, I'm going to highlight some of the pros and cons of the five most common options, and they are Custodial accounts, brokerage accounts owned by adults, the New Trump accounts, Roth IRAs, and 529 college savings plan. Start with custodial account. These are just brokerage accounts, but since a minor can't completely control a brokerage account until they reach the age of majority, it has to be a custodial account. These are usually called UGMAs or UTMAs. The Uniform Gifts to Minors Act was passed in the '50s. Most states now also allow the Uniform Transfer to Miners Act, the UTMA, passed in the '80s. That generally has more flexibility, so it's generally better to go with UTMA if you can, but it does depend on your state because not every state allows the UTMA. What are the pros of these? Well, first of all, investment flexibility. It's a brokerage account so you can pretty much buy whatever you want. Also, UTMAs allowed for investments in real estate and alternative assets. There are some tax advantages for unearned income. This is a so called kitty tax that applies to anyone who is under the age of 18 or under the age of 24 if they are a full time student. There's also rules regarding whether they have so much earned income that it exceeds 50% of their support, which doesn't apply to most people, but basically, the tax advantages are that the first $1,350 of unearned income, that's capital gains dividend interest, is tax free, and then the next $1,350 is taxed at the child's rate, and then bey ond that, it's taxed at the parents rate. I should point out that these numbers change every year. Another benefit of custodial accounts is there's no contribution limits. You can contribute as much as you want. However, there could be gift tax consequences that is in 2026, if one person gives another person more than $19,000, they have to report it on Form 709.

Generally, you don't have to owe taxes because that just then eats into your unified lifetime gift and estate taxes collusion, which is $15 million per person, twice that if you're married. It's generally not an issue for most people, but it probably does mean you have to file an extra form if you give more than $19,000. What are the downsides of custodial accounts? Well, first of all, it's an irrevocable gift, can't take it back, and the money must be used for the kids benefit. You lose control when the kid becomes an adult, and this will depend on the state and the type of account you choose. Generally, 18 to 21 can be as high as 25 in some circumstances, but at that age, the account owner, the kid, no longer a kid, can use the money for anything, not necessarily college or other purposes you intended. There also could be an impact on financial aid for college because custodial accounts are considered a student's asset, and anything that is owned by the student will reduce financial aid eligibility more than anything that's owned by the parent or another adult. Let's move on to our second option here, and that is the brokerage accounts owned by an adult. This is basically a way to get around the disadvantages of the custodial account. It's basically you own the account it's just in your name, but then when you think the kid is ready for the money, you gift the account to the kid who hopefully then is a responsible adult. One thing just to know is then the cost basis goes over as well. Ideally, there's gains in there. If it's at a loss, it's more complicated. In that case, it's probably better for you as the adult to sell the investment, take the capital loss on your tax return and then gift the cash. What are the benefits of doing it this way? Well, again, complete control. You maintain full ownership and control over the assets indefinitely, and you decide when to transfer the funds to the kid. Again, unlimited investment choices. You choose the account and you can buy pretty much whatever you want.

A lower financial aid impact because it is owned by you if you're the parent, it will still affect financial aid, but not as much, but you may be a grandparent or some other well-meaning adult, and then it won't likely affect aid at all, and then no contribution limits, but again, there could be gift tax consequences. What are of the downsides of this? Well, first of all, you own the account, so you're going to owe all the taxes. Any dividends, interest, capital gains are going to be reported on your tax return. There are no special tax benefits, custodial accounts, as well as some of the other accounts we're going to discuss. They have some tax advantages, but not so with this case. Then the other one is probably more of a consideration than a downside, and that is just make sure it's factored into your estate plan. If you open this account and you want it to go to someone specific, make sure that's in your will or maybe make it a transfer on death account, so it goes to the intended beneficiary if something happens to you. Let's move on to Trump accounts. These were created by the One Big Beautiful Bill passed last year. These Trump accounts, also known as 503A accounts. They're tax deferred accounts that could be open for anyone with a Social Security Number who will be younger than 18 by the end of the year. The accounts could actually be opened now by filing Form 4547 with a 2025 tax return or by completing the form at trumpaccounts.gov. However, the accounts can't be funded until July 5th, 2026. Size it aside, while these accounts are new, the idea has actually been around for many years with some bipartisan support. A previous iteration was called baby bonds, and I was actually part of a couple of discussions about how they should be invested. I'm personally happy to see that these accounts are now available. Though they're a bit more limited than I would have preferred, but we'll get into that. Let's get into the advantages of these accounts. Tax deferred growth. The investments grow tax deferred. Withdrawals of earnings are taxes ordinary income, the after tax contributions that you put in to fund the accounts won't be taxed when distributed. You could get a contribution from Uncle Sam. US citizens born between January 1st, 2025 and December 31st, 2028, are eligible to receive $1,000 from the US Treasury that gets deposited into the account. What are some of the downsides? Well, first of all, a limited menu of investments. The only investments available in Trump accounts will be low cost index funds that the providers haven't yet been determined. There are contribution limits. Families, friends, and employers can contribute up to $5,000 per year per child. Contributions by individuals are not tax deductible. There are some early withdrawal prohibitions. Basically, the money must be left in the account until the beneficiary turns 18.

Another downside of Trump accounts is that there are penalties on non-qualified withdrawals. Once the child turns 18, the account essentially becomes a Traditional IRA, which means the withdrawals of earnings will be taxable at any time, but withdrawals before the age of 59.5 will be assessed a 10% penalty, though there are some exceptions that apply to all Traditional IRAs, such as for qualified higher education expenses and first time home purchases up to a limit. Some of these other accounts, they're irrevocable and loss of control. At age 18, the account owner can use the money however they wish. Then the final downside is just that there are some lingering unknowns. Not all the details of Trump accounts have been worked out yet, such as which financial services firms will actually be holding these accounts. It's also unclear how Trump accounts will affect financial aid eligibility. You can monitor the official website. Again, that's trumpaccounts.gov for updated information. I expect more and more information will be coming out over the next few months. Now let's move on to Roth IRAs, and I'm choosing the Roth specifically. You could open a Traditional IRA for a kid, but remember, with the Traditional IRA, you get a tax deduction, but the withdrawals are taxable, but most kids don't need a tax deduction, which is why you would go with the Roth. No tax break today, but the money grows tax free as long as you follow the rules. Roth IRA could be open for any kid who has earned income. Let's talk about some of the benefits. First of all, decades of tax free growth. The IRA started in childhood could grow for 50 plus years, potentially resulting in a substantial wealth by retirement. You do also have semi-flexible withdrawals with the Roth IRA, the contributions, not the earnings, but the contributions can be withdrawn at any time, tax and penalty free. It's limited to no financial aid impact. Retirement accounts are generally not counted for financial aid purposes, especially when you're using the FASA.

Now, individual colleges may have their own reporting requirements, especially the 300 or so that use the CSS profile, so definitely pay attention to the financial aid reporting requirements for the colleges that you may be considering for your kids. What are the downsides of the Roth IRA? Well, first of all, the kid must have earned income from a job, and the contribution cannot exceed what they earned that year. That income's going to be pretty easy to document if they're working at McDonald's or something like that, because they're going to get the W-2, but what about cash based jobs like, babysitting or lawnmowing? There's a bit of a debate about this among TaxPros, but I think the bottom line comes down to that type of income qualifies if the child keeps detailed records about where the money came from, deposits some money in a bank account, and files a tax return, but you might want to check with your local favorite TaxPro just to make sure. Roth IRAs do have contribution limits, annual contributions are capped at $7,500 in 2026. There are penalties for early withdrawals of earnings. While the contributions can be withdrawn and tax or penitivey free, the earnings cannot be accessed without penalty until age 59.5, there are some exceptions. Finally, also with Roth IRAs, the contributions are irrevocable and you do lose control once the kid becomes an adult. Finally, we have 529 college savings plans. These are state sponsored accounts specifically designated for educational savings, when they were originally created, they really were mostly for college, but due to a series of laws that have been passed, including last year's One Big beautiful Bill, the list of qualified expenses have expanded to include all kinds of things elementary school, secondary school, paying back student loans. There are limits on all this, even for professional fees, taking certain standardized tests.

A great source for an updated list of qualifying expenses for 529 plants is savingforcollege.com. Visit that to learn more. I'm just going to focus on 529 because they're the most popular. There is another option called the Coverdale which might be appealing to you if you want to invest in individual stocks for college, but I'm not going to cover it here, but definitely do that research if you're interested. What are the pros of a 529 account? Well, tax free growth, as long as the withdrawals are used for qualifying education expenses, room, board, books, all kinds of things. Favorable financial aid treatment, the 529 is owned by the adult who opens it. If it's a parent that will have a lower impact on financial aid eligibility, if it's owned by some other adult, like a grandparent, it may not be reported at all for financial aid, but again, that varies on the school, and that's not the case for the CSS profile, so pay attention to the requirements of the schools you're interested in. High contribution limits. There's no annual contribution limit to 529. There are lifetime contribution limits, but the limits range from $240,000 to $500,000. If you have any reason to exceed that limit, you can just choose another states 529 because you do not have to use your own states 529. You do have retained control of these accounts. The person who opened the account, the adult parent, grandparent, or other adult, they maintain control and can change the beneficiaries at any time if needed. You might get a state income tax deduction. More than 30 states allow taxpayers to deduct contributions to 529 on the state income tax return, but subject to varying rules and ibt. Definitely see what is possible in your state. What if your kid doesn't want to go to college? Well, there are options for excess savings. It can be transferred to another qualifying relative, siblings, cousins, even yourself, if you want to go back to school. Also, any unused money can be transferred to a Roth IRA for the beneficiary. There are a lot of rules and limits that apply to this, one being that the 529 has to have been open for at least 15 years, but there are many more. Do your research before you try to do that, but you do have options. That's the good news. What are the downsides of the 529 accounts? Well, limited investment options. 529 basically offer a menu of mutual funds or maybe ETFs chosen by the state, a lot of 401(k) plans. If you really want to buy individual stocks, for example, you can't do that in a 529. There are penalties for non-qualified withdrawals. The money you contributed on an after tax basis, that will come out tax and penalty free, but earnings portion that is withdrawn, not used for qualifying expenses will be taxed and subject to a 10% penalty. Also, if you took a state income tax deduction on the contributions, but then didn't use the money for college, or in some cases, if you transfer that money to another state's 529, there may be a recapture of that deduction that you were able to take on the contribution.

Again, just do a little more research into what's available in your state. Then the final downside, and this is just my opinion, it's not very fun for the kid to see the investment account grow, and then it's used for college.I like the idea of another account where they can use the money to do other things like buy a car, buy a house, take a trip, things like that. That's just my personal opinion, but you may feel like, No, this is great for the kid. They feel like they have skin in the game and contributing to their own education. Those are the five account choices. Which one should you choose? Well, that, of course, depends on your situation and preferences, but the good news is that you don't have to choose just one. I'll just tell you what my wife and I did. We opened up 529s for our kids soon after they were born and mostly stuck to the age based portfolios offered in the plans that we complemented them with more aggressive funds when they were younger. Our kids knew they had 529 plans, but we didn't spend time going over the accounts with them. More of the education happened with the bodas custodial accounts that we opened for our kids, investing them in index funds of various assets, large caps, small caps, international, but then once the kids were old enough, they helped choose some of the stocks in the accounts, starting with a list of recommendations from the Fool Stock Advisor Service. Then when they were teenagers and had jobs, we opened Roth IRAs for them, and again, investing the money in index funds and individual stocks. It seemed to have worked for us and our family, and I know it got each of our kids much more interested in saving money and investing. Finally, I just want to make sure you understand that what I've discussed in this episode really does just hit the highlights. There is a lot more to learn about each of these accounts. Do additional research and perhaps speak to a financial or tax professional.

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Robert Brokamp: Time to get it done Fools, and this one is for the pet owners out there. It comes from an article in the recent issue of Kiplinger Magazine entitled, "Why FIDO should be in your state plan." We're not just talking about dogs, we're talking about all pets because without a plan, a pet's future is left to chance if you pass away and may end up in a shelter instead of a stable home. Experts recommend naming a successor, caregiver, and a backup whose lifestyle home and personality fit the pet and making sure that you check at least once a year just to confirm they still want to do it. Naming a specific person also prevents future fights if more than person would like to take over caring for your pet. You should also set aside some money for expenses with the amount based on the pets age, health, and expected lifespan. Actor Diane Keaton reportedly left her golden retriever about $5 million through a pet trust, but you probably don't need to leave that much. According to the article, it costs about $1,700 a year to care for a cat or a dog, and a pet trust might make sense since pets can't inherit money directly. That, my friends, is the show. Thanks for listening and thanks to Bart Shannon and his cat. For engineering this episode, as always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool Editorial standards, and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To you see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on, everybody.

The Motley Fool has positions in and recommends Amazon, Goldman Sachs Group, and MSCI. The Motley Fool has a disclosure policy.