If you want your kids to grow into wealthy, financially literate adults, you’re going to have to teach them about money yourself. American public school systems certainly don’t teach financial literacy. It’s one reason 96% of Americans can’t pass a basic financial literacy test.
I grew up in a middle-class household with well-educated parents. But despite their parenting strengths, I had to teach myself financial literacy. Many of the lessons proved expensive, learned the hard way through trial and error.
Teaching your kids about money lays the groundwork for your descendants to lead wealthy lives for generations to come. One way you can do that is by opening certain financial accounts for your children while they’re young.
Making a Millionaire: The Power of Starting Young
Imagine you and your teenager deposit $6,000 into a Roth IRA every year for five years, from the time they’re 14 to the time they’re 19. At an average return of 10% — in line with historic S&P 500 returns — they’d have $40,293.66 in the account after those five years.
Then say they never invested another cent. The account simply compounds on itself for the next few decades, quietly growing in the background with neither deposits nor withdrawals.
By age 65, your child’s account will have ballooned to nearly $3 million ($2,937,024.37, to be exact). They didn’t invest a cent after the tender age of 19, yet they’d retire a multimillionaire.
That’s the power of compound interest: Time does the heavy lifting for you.
8 Accounts to Teach and Build Wealth for Your Kids
If you want to increase your kids’ financial literacy IQ, plan to do it yourself. No one else will show them the ropes of building wealth.
That’s the bad news. The good news is that you can pave their way to wealth as you teach your kids how to save, invest, and manage their financial portfolios.
Here are eight financial accounts to open with your kids, when to open them, and how to use them for maximum effect in creating generational wealth.
1. 529 College Savings Plan
As a parent, you can start contributing toward your child’s 529 college savings plan from the moment they’re born.
These plans come with a range of tax benefits. They inherently grow tax-free and withdrawals are tax-free, similar to a Roth IRA account (more on those later). Unlike Roth IRAs, there’s no federal limit on contributions.
Each state imposes a per-beneficiary contribution limit, but these limits are typically quite high. The states with the lowest limit, for example, allow lifetime contributions of up to $235,000 per beneficiary.
While the IRS does not allow you to deduct these contributions from your federal taxable income, most states allow you to deduct them from your state taxable income. To minimize federal taxes, talk to your accountant about declaring your 529 plan contribution as a tax-exempt gift.
When it comes time for your child to withdraw the money, they can do so tax-free for all college education expenses, such as tuition and books. If they have money left over in the account, they can assign a new beneficiary, such as your next child headed to college a few years later.
Alternative options include Coverdell Education Savings Accounts (ESAs) and Uniform Transfers to Minors Act (UTMA) accounts as well, if you prefer nationwide consistency.
When to Open the Account
Open a 529 plan when your child is born. If you invest $2,000 every year until they graduate high school at 18, the account will have over $100,000 in it if they earn a 10% average return. Invest $1,000 per year, and they’ll still have over $50,000 — a decent start on their college costs.
Opening an account is simple. You can use a company like Backer or open a state-specific account through the tool below.
2. Checking Account
Checking accounts won’t make your kid rich one day. But your child still needs to learn how to create a budget if they ever hope to build wealth on their own, and bank accounts can help them learn how to manage a budget in the safe environment of your home.
The problem with most parents’ approach to teaching kids about money is they only give them revenue, not any expenses. As a result, kids develop bad budgeting and spending habits. They treat all expenses as discretionary because that’s all they’ve ever known.
Instead, consider trying to mimic real-world financial conditions for your kids. Instead of giving them a $20 allowance, give them a $100 allowance, then charge $80 of it back to them for rent, groceries, utilities, transportation, and other expenses your kids will face in the real world.
Don’t just withhold it from their allowance, either. That defeats the purpose. Make them write you a physical check or transfer the money electronically. If they overspend and can’t cover their expenses, make sure you have a consequence in place, such as repossessing some of their favorite objects until they pay up.
Check out our list of the best free checking accounts to get started. Copper is one of our favorite accounts for teens.
When to Open the Account
Each child is different when it comes to their maturity and comprehension levels, but aim to open a checking account with your child between the ages of 8 and 10. Start simple, tying their income to chores and charging them mock real-world expenses. As they grow older, you can teach them more complex financial lessons like entrepreneurship and perhaps even help them open their own age-appropriate business.
3. High-Interest Saving Account for an Emergency Fund
If every adult should have an emergency fund in savings, shouldn’t you teach your kid to build one as well?
Open a high-interest savings account with your child, and have them start setting aside a certain percentage of their income each month toward it. The point isn’t that they might face a financial emergency next month. The point is to build good financial habits from the very beginning.
Check out our list of the best high-yield savings accounts and this month’s best bank account promotions to get started with the best interest rate.
When to Open the Account
Open the savings account at the same time you open the checking account. It could be at the same bank or at a different financial institution so your child isn’t tempted to access it every time they log into their online banking.
4. Roth IRA
Your child can’t open a Roth IRA account until they start working and filing a tax return.
Of course, you could hire them yourself if you’re self-employed or own a business, even if it’s a part-time hobby business. This helps you and your child in a multitude of ways.
First, it reduces your own taxable income. You can claim any wages paid to your kids as a business expense, reducing the income you actually pay taxes on.
Second, it won’t affect your kids’ finances as much as it would yours if you kept it in your account. While your child does need to declare the income and possibly pay taxes on it, their income tax bracket should be significantly lower than yours. In fact, if you pay them less than the standard deduction amount, which is currently around $13,000 but changes annually, they shouldn’t owe any federal income taxes at all.
The best-case scenario: You reduce your taxable income and they owe nothing or very little in taxes. It’s an instant win for your household.
As always, make sure you consult a tax professional for these types of decisions.
If you go this route, your child can contribute up to $6,500 or their total income (whichever is lower) to their Roth IRA. As outlined above, even a few years of maxing out their Roth IRA contributions as a teenager will lay the foundation for millions of dollars in their account by the time they reach their 60s.
Keep in mind that Roth IRAs are extremely flexible. Your child can withdraw funds early to use as a down payment on a house or withdraw contributions to put toward college tuition in a pinch. While they should ideally let their Roth IRA compound for retirement, the account leaves plenty of room for other uses if needed. In short, it’s the perfect vehicle for ensuring your child’s financial future.
When to Open the Account
While the Fair Labor Standards Act sets the minimum age for hiring children at 14, that doesn’t apply to your own children. Consider creating a job for them in your business if you own one. If not, you can always start a side gig business to simultaneously earn more money, teach your kid about entrepreneurship and personal finance, employ them for Roth IRA purposes, and reduce your household tax rate.
Alternatively, help them get a job elsewhere if they’re 14 or older. Do whatever you can to help them maximize contributions to their Roth IRA for lifelong financial security.
You can open a Roth IRA in just minutes through an online broker like M1 Finance or with a robo-advisor like Betterment.
5. Taxable Brokerage Account
When you go to open a Roth IRA with your teenager, open a taxable brokerage account for them while you’re at it. They’re free to open, and you can use the account as a teaching aide for other investing lessons.
The Roth IRA account is perfect for teaching kids passive investing, such as buying a handful of index funds, because you can set it and forget it. But with a taxable brokerage account, you can be more aggressive. Perhaps you pick some stocks together to buy or show your child how to use stop orders and limit orders to trigger purchases and sales. If you earn a hefty return on a particularly good investment, you could let them withdraw part of it to celebrate.
In other words, use the regular brokerage fund to show them more advanced investing tactics and to occasionally withdraw funds if needed, rather than the simple buy-and-hold passive investing strategy that works so well with retirement accounts.
A recent Gallup poll found that about 61% of Americans own stock. Many of the other 39% simply don’t understand how to open a brokerage account and buy and sell stocks. By showing your teen how to use a brokerage account, they’ll be far more comfortable than their peers with investing by the time they graduate and enter the real world.
When to Open the Account
Open a taxable brokerage account simultaneously alongside a Roth IRA. Make sure you check out the current brokerage promotions because you might be able to receive a cash bonus or free stocks.
6. Credit Cards
Credit cards are tools. They’re dangerous as well as useful, and they require skill to use properly.
By opening a basic, student-oriented credit card, you can not only teach your teen how to use cards properly, but you also help them establish good credit at a young age.
Start with the simplest lesson of all: Pay your balance in full each month. If they fail to do so, take the card away until it’s paid in full. Keep an eye out for fundamental credit card mistakes and correct them.
Teach your teen how to use credit card rewards wisely, how to leverage 0% balance transfers, and how credit cards can form another line of defense against financial emergencies — as long as they don’t maintain an ongoing balance.
When they head off to college or to join the workforce, they’ll have the skills they need to wield credit cards to their advantage, rather than as a debt trap.
When to Open the Account
Consider opening a credit card for your teen a year or so after they start working. Teach them to invest in their Roth IRA and brokerage account first, telling them about the power of returns and compounding, before handing them the temptation of a credit card.
7. Credit Builder Loan
The term “credit builder loan” is misleading. These loans aren’t borrowed from a lender — they’re borrowed from you, the borrower.
It works like this: To build credit, you open an account with a credit builder “lender.” You choose a plan in which the lender pulls money from your checking account every month for a certain number of months, usually ranging between six and 24 months. The money goes into a CD or other safe account under your name.
At the end of the loan term, you get your money back, minus a small fee.
That sounds awfully pointless and circular, considering you’re paying someone else to hold your money rather than earning a return on it. But the lender reports your monthly payments as an installment loan, helping you establish good credit with a history of on-time payments. This can be a useful way for young adults to establish a good credit history without taking on any real debt.
When to Open the Account
Opening a credit builder loan account through a company like Self is purely optional. But for a small fee, you can lay the groundwork for your child to reach adulthood with excellent credit already established. See this list for more ideas to build credit without a credit card.
8. Health Savings Account (HSA)
As tax-deferred accounts go, health savings accounts (HSAs) arguably offer the best tax advantages. They offer triple tax protection: Contributions are deductible in the year you make them, the contributions grow tax-free, and withdrawals are tax-free.
HSAs come with a few strings attached, though. First, withdrawals can only be used for health-related expenses. Second, account holders must be covered under a high-deductible health care plan with an annual deductible of at least $1,500 for individuals or $3,000 for families. Finally, they come with annual contribution limits, just like IRAs: $3,850 for individuals and $7,750 for families in 2023.
Here’s where HSAs get interesting for parents of young adult children: Your adult children can be covered by your health care plan until they’re age 26, but you can’t withdraw money from your HSA to cover their medical expenses if you no longer claim them as a dependent on your tax return.
That means your 18- to 26-year-old children can open their own HSA while covered under your family health care plan. They — potentially with your help — can make contributions to their own HSA to both reduce their taxable income and invest the money tax-free.
In fact, many Americans have started using HSAs as secondary retirement accounts. They take advantage of the triple tax protections, knowing they’ll have no shortage of medical expenses in retirement. One estimate reported by CNBC found the average 65-year-old couple today could expect to spend nearly $390,000 on health care in the remainder of their lives.
Your adult child can funnel money into their HSA knowing it won’t go to waste. It forms yet another emergency fund and another source of funding for retirement.
When to Open the Account
If you use an HSA as part of your health care strategy, help your adult child open their own HSA through Lively when you can no longer claim them as a dependent on your tax return.
Final Word
Gone are the days when people worked for the same company for 45 years then retired on a pension and Social Security. Among other ways retirement has changed, today’s workers are largely responsible for their own retirement planning — a troubling thought, given most Americans’ poor financial literacy.
You can pave the way for your children to enjoy lifelong wealth. Not through trust funds or inheritances, but through a combination of teaching them financial literacy and helping them invest while they’re young. By the time they have children of their own, their net worth will far outstrip their peers. And when they reach retirement age, they’ll be millionaires even if they never invest another cent.
Just remember not to ignore your own retirement investments in your quest to help your kids pay for college and get a head start on building wealth. Your retirement planning must come first, or your kids will have an unwelcome houseguest just as they’re trying to raise their own children.