In addition, much like winning the lottery, suddenly getting control of a decent chunk of money can cause problems for a young adult who isn’t quite ready for the responsibilities that brings with it. “Easy money” is easily spent, lost, or given away, and once it’s gone, it’s gone. As a result, it’s important to teach and coach good money management skills instead of just handing over the cash.
Also, investment income belonging to a child is subject to taxation. While the first $1,050 is untaxed, the next $1,050 is taxed at the child’s rate, and anything above that is taxed at the parent’s rate. That can add filing complexity to a family’s tax tracking and reporting and is another thing to be aware of.
Get started to make it a reality
In the end, if investing early helps your child figure out how to be a good financial steward and helps him or her start of independent life without carrying a huge debt anchor, it can be worth it. The strong financial skills will serve your child well throughout a lifetime. And as a bonus, a single $1,000 investment at age 13 can potentially be worth over $170,000 by the time that child reaches retirement age. That’s an incredible start on a nest egg, and it’s made much easier by starting early.