A brokerage account allows parents with side gigs to invest earnings for their children’s future, offering flexibility to buy stocks, bonds, and ETFs. Custodial accounts, managed by parents until the child reaches adulthood, provide tax benefits and teach financial literacy. This article explores types, benefits, tax implications, and how to choose the right brokerage for side gig income.
Understanding Brokerage Accounts for Parents with Side Gigs
Parents with side gigs—whether freelancing, driving for rideshare apps, or running small businesses—often generate irregular income that can be leveraged to secure their children’s financial future. A brokerage account is a powerful tool for investing this income, offering flexibility and potential for long-term growth. Unlike traditional savings accounts, brokerage accounts allow parents to invest in a range of assets like stocks, bonds, mutual funds, and exchange-traded funds (ETFs), which can outpace inflation and build wealth over time.
For parents with side gigs, a custodial brokerage account is particularly relevant. These accounts, typically set up under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), are opened in a child’s name but managed by a parent or guardian until the child reaches the age of majority (usually 18 or 21, depending on the state). The assets legally belong to the child, but parents control investment decisions, making it an ideal vehicle for side gig earnings.
Types of Brokerage Accounts for Kids
Custodial UGMA/UTMA Accounts: These accounts allow parents to invest in traditional securities like stocks, bonds, and ETFs. UTMAs also permit non-traditional assets like real estate or art, though these are less common for side gig investors. Contributions are irrevocable, meaning once funds are deposited, they belong to the child. There are no contribution limits, but gifts exceeding $19,000 per individual ($38,000 for couples) in 2025 may trigger federal gift tax.
Custodial Roth IRAs: If a child earns income (e.g., from a part-time job or modeling), parents can contribute side gig earnings to a custodial Roth IRA, up to $7,000 annually or the child’s earned income, whichever is lower. This account offers tax-free growth and withdrawals in retirement, making it a strategic choice for long-term planning. Allowance doesn’t qualify as earned income, but side gig income can be used to fund the account.
Teen-Owned Brokerage Accounts: Some brokers, like Fidelity, offer teen accounts (e.g., Fidelity Youth Account) for ages 13–17, where teens manage investments under parental oversight. These accounts transition to standard brokerage accounts at 18, offering hands-on learning. They’re less common for side gig funds but can be a teaching tool if the child is mature.
Benefits of Brokerage Accounts for Side Gig Parents
Flexibility: Unlike 529 plans, which are restricted to educational expenses, custodial brokerage accounts can be used for any purpose benefiting the child, such as medical costs or future home purchases.
Tax Advantages: The “kiddie tax” applies to unearned income (e.g., dividends, capital gains). In 2025, the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate (often 10%), and amounts above $2,700 are taxed at the parent’s rate. Since children typically have lower tax brackets, this can reduce tax liability compared to a parent’s standard brokerage account.
Financial Literacy: Managing a custodial account allows parents to teach kids about investing, compound interest, and portfolio diversification. Involving children in decisions fosters lifelong money habits.
Compounding Growth: Side gig income invested early benefits from decades of compounding. For example, $5,000 invested at a 7% annual return could grow to over $29,000 in 25 years, per historical stock market averages.
Tax and Financial Aid Considerations
While custodial accounts offer tax benefits, they have drawbacks. Assets in UGMA/UTMA accounts are considered the child’s for financial aid purposes, impacting eligibility more than parent-owned accounts or 529 plans (20% of custodial assets vs. 5.64% of parental assets count toward the Expected Family Contribution). Liquidating a custodial account into a 529 plan can mitigate this, though it requires careful planning.
The kiddie tax also complicates matters if investment gains exceed $2,700 annually, as higher earnings are taxed at the parent’s rate, which could be 37% for high earners. Side gig parents should consult a tax advisor to optimize contributions and avoid unexpected tax bills.
Choosing the Right Brokerage
Selecting a brokerage firm requires evaluating fees, investment options, and educational resources. Top firms offering custodial accounts include:
Charles Schwab: Known for low fees, commission-free trades, and robust educational tools. No contribution limits and strong customer support make it ideal for beginners.
Fidelity: Offers UGMA/UTMA accounts and the Fidelity Youth Account for teens. Zero-fee index funds and no account minimums appeal to cost-conscious parents.
Acorns Early: A micro-investing platform with a 1% match on up to $7,000 in contributions. Its mobile-first approach suits tech-savvy parents, though it requires a subscription.
E*TRADE and Vanguard: Both offer custodial accounts with diverse investment options. E*TRADE is mobile-friendly, while Vanguard emphasizes low-cost index funds.
When choosing, consider:
Fees: Look for $0 trading commissions and low expense ratios. Firstrade, for example, offers commission-free trading on stocks, ETFs, and mutual funds.
Investment Options: Ensure the brokerage supports your preferred assets (e.g., ETFs for diversification or individual stocks for hands-on learning).
Ease of Use: Online platforms with intuitive interfaces simplify account management for busy side gig parents.
Reputation: Research the firm’s history and customer reviews to ensure reliability.
Using Side Gig Income Effectively
Side gig income is often sporadic, making disciplined investing crucial. Parents can:
Automate Contributions: Set up recurring transfers from a linked bank account to ensure consistent investing, even during lean months.
Diversify Investments: Use low-cost ETFs or mutual funds to spread risk, especially if side gig income fluctuates. For example, the Vanguard S&P 500 ETF (VOO) tracks the market with a 0.03% expense ratio.
Involve Kids: Discuss investment choices with children to teach risk vs. reward. For instance, explain why a diversified fund might be safer than a single stock.
Monitor Taxes: Track realized gains to stay within the $1,350 tax-free threshold. Holding investments long-term minimizes taxable events, as gains are only taxed when sold.
Potential Risks
Custodial accounts have limitations. Once the child reaches the age of majority, they gain full control and can use funds for any purpose, which may not align with parental goals (e.g., spending on non-essentials). Additionally, irrevocable contributions mean parents can’t reclaim funds if financial needs change.
For side gig parents, irregular income can also pose challenges. A sudden drop in earnings might limit contributions, requiring a flexible investment strategy. Consulting a financial advisor can help balance side gig volatility with long-term goals.
Practical Steps to Open an Account
Research Brokers: Compare platforms like Schwab, Fidelity, or Acorns for fees and features.
Gather Documents: Provide personal and banking information, including Social Security numbers for parent and child.
Choose Account Type: Decide between UGMA/UTMA, Roth IRA, or teen accounts based on the child’s income and goals.
Fund the Account: Use side gig income, gifts, or transfers from other accounts. Start small if needed—many brokers have no minimums.
Invest Wisely: Allocate funds to diversified assets and review performance regularly with your child.
Disclaimer: This article is for informational purposes only and not intended as financial advice. Consult a financial advisor or tax professional before making investment decisions. Sources include industry reports, financial websites, and brokerage firm data.
