Last week, my fiancé received an unusual email from his parents asking, “What is your social security number?”
After making sure I wasn’t being scammed, I submitted it and received a bit of good news. His grandparents opened an investment account for him soon after he was born, and he is now the proud owner of a portfolio of Coca-Cola stocks.
Well, the account technically became his on his 18th birthday, but he’s 30 now. So why did his parents wait so long to tell him? In fact, they had forgotten about it, his mother told him over the phone. Plus, she added, she didn’t have Ryan to help her plan how to use it.
That was a valid point. As soon as I heard this news, I started calculating the capital gains tax my fiancé would pay if he sold the stock to raise money for the wedding. If I were 18 years old, I probably would have started researching the prices of used sports cars. So I started thinking about what the New York Times recently called the “new investor class”: children.
Thanks to the rollout of Trump Accounts authorized by last year’s One Big Beautiful Bill Act, a generation of children will come of age with investment accounts they manage. And unlike my fiancé, I don’t have a financial writer cooking in another room when I get the news.
That’s why it’s a good idea to talk early and often with your kids about the money you’re investing for them, including how it will be managed and its purpose, says Megan McCoy, a financial therapist and Kansas State University professor.
“If the intention is to gain a foothold in your future, reduce financial stress, and help you achieve your financial goals, we need to have a conversation so you don’t feel like you just found the money,” she says.
How custodial accounts and Trump accounts work
Traditionally, if you wanted to open an investment account on behalf of your child, you would open a custodial account, such as a UGMA (Uniform Transfer to Minors Act) or UTMA (Uniform Transfer to Minors Act). There are some differences between the two account types, but the general rules are the same. The account legally belongs to your child and comes under their control once they reach the age of 18 to 25, depending on your state.
Once in control of a UGMA or UTMA account, a child can use the funds for any purpose, distinguishing them from more specialized vehicles such as so-called 529 accounts for education savings. Also, like a brokerage account, realized gains are taxable. This means that if your child sells the investment for more than you paid for it, he or she will pay capital gains tax.
There are some additional conditions attached to the money your child is about to receive through a Trump account. Similar to parent accounts, adults can fund Trump accounts on behalf of their children, up to a maximum of $5,000 per year per child. Once a child turns 18, they essentially have control over a traditional IRA. Money borrowed before age 59 1/2 is subject to income tax and a 10% early withdrawal penalty, with some exceptions such as education expenses and certain home purchase costs.
But even with these restrictions in place, it’s easy to imagine young people taking money and spending it without having specific financial conversations, says John Rupp, a certified financial planner with Haven Financial Advisors.
“You’re going to run into a situation where there are absolutely a lot of 18-year-olds who don’t have the ability to handle large sums of money,” he says, and that can have negative consequences for the child. At best, financial experts say, children who lack the ability to handle money may end up spending money thoughtlessly instead of achieving their financial goals. In the worst case scenario, you may have already spent the money you had to pay and end up facing a tax bill.
When communicating your financial goals pays off
To avoid this, it’s important to educate kids about money early and often, and that starts with a baseline of good financial hygiene, Rapp says.
“It waxes and wanes as you get older, but those are the basic principles: spend less than you earn, let go of some of the extra stuff, and invest in things that actually work for you and are beneficial for you and grow for you,” he says. “Those basics are the most important.”
From there, if you’re putting money into investments on your child’s behalf, it’s important to explain some basic lessons about the accounts your child will inherit. One is the tax implications of the accounts they hold. If you have invested in assets that have appreciated in value over time in a custodial account, you will be liable to pay capital gains tax if your child sells the investment. If your child plans to cash out of their Trump account early for non-educational expenses or home purchase costs, it’s important to know what penalties they may pay on top of their income tax bill.
If your child reaches young adulthood and faces a particularly complex tax situation related to one of these accounts, McCoy says he may recommend consulting with a financial professional.
Financial experts say it would be wise to also explain the power of compound interest. Morningstar researchers predict that the average Trump account holder, who receives annual contributions of $1,000 from birth, will have more than $50,000 in assets by age 18. While that’s a lot to spend, it’s worth noting that the same investor who makes no additional contributions to the account as an adult could have more than $850,000 by age 55, according to Morningstar’s calculations.
This is an important concept to tie into conversations with your child about short-term and long-term goals, McCoy says.
“What good is it to postpone gratification so you can use that money for bigger goals in the future?” she says. “It’s not just one conversation. I think we’re having many conversations about our dreams and hopes for the future.”
Overall, McCoy says it’s important to be as clear as possible with your kids about the intentions behind the money you’re investing for them. Perhaps you want to get them started on retirement or on the path to buying their first home. Discussing these ideas will help you make the most of your money when it’s in your control, she says.
“Instead of saying, ‘This is a goal you need to pursue,’ help them verbalize what they want for the future and how you can help them get there.”
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