Can I Open a Brokerage Account for my Child?
Yes you can, but you will have a few more choices on what type of account you are going to open for your child than if you were opening one for yourself.
If your child does not get a paycheck, then you can choose between two types of accounts where there are no maximum contribution limits. The first is a guardian account, in which you own the money. You can withdraw it for any reason you want, and you are the one who is liable for the taxes on the earnings. You have got total control, and the price for this is that you pay taxes at your own tax rate. Practically speaking, then, this type of account is basically a way for you to informally earmark funds for your child in an account in your name.
The other type of account is a custodial account, where you do not own the money your child does. As long as your child is a child, you still control the account, but any withdrawals (or dividends, for that matter) are taxed at your child's rate. This is, of course, generally lower than your own. In other words, you have given up some long-term control as well as ownership, but it is usually a better deal from a tax standpoint. There are two kinds of custodial accounts: the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA).
IRA accounts are another alternative. In order to have a regular IRA or a Roth IRA, the owner of the account must have earned income. That means that you cannot open one of these for your child until she is actually earning income.
The Education IRA is in a category all its own. Your child could have a traditional IRA or a Roth IRA, but you can only invest a total of $3,000 yearly into one of them. The $500 maximum that you can invest yearly in an Education IRA is in addition to that $2,000.