How Do I Make My Kid Filthy Rich (Without Going Broke)?

Tyler Gardner (0:00)

The best gift you can give your kid might not be a pile of money. It might be the option to take a breath, make a better decision, and not have to trade their values for the paycheck. And if that's not wealth, I genuinely don't know what is. Hello, friends. This is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. There's a strange moment in every parent's life when you realize your child has no concept of taxes, rent, or the tragic economics of buying popcorn at the movie theater. They believe money comes from thin air, or your phone, or if they're slightly more financially literate, a small magical debit card named Mom. And yet here you are listening to a podcast episode titled How to Make Your Kid Richer Than You Ever Were, which is very noble, slightly masochistic, but very noble. Now, let me be clear. I'm not saying your nine-year-old needs a brokerage account, a Roth IRA, and a six-part estate plan by Labor Day. But I am saying that small steps now, boring, paperworky, barely even Instagrammable steps, can turn into serious wealth later. And I don't mean Lamborghini wealth. I mean choices, flexibility, the ability to take a sabbatical or turn down a job that requires a lanyard.

In this episode, we're going to cover three surprisingly powerful tools. Number one, the Custodial Brokerage Account, aka Baby's First Capital Gains Tax. Number two, the Custodial Roth IRA, aka Give Your Kid the Superpower of Tax-Free Growth Before They Even Understand What a Tax Bracket Is. And three, the 529 Plan, aka College is Coming and Textbooks Are Not Getting Any Cheaper. Each of these accounts has pros, cons, and most importantly, a couple landmines that we need to avoid. Because yes, your child might one day thank you, or they might use the money to invest in a llama-themed NFT. We can't control the future, but we can set it up better. Also, if this episode helps you, or if you just want to support this show in the same way your child supports their Roblox addiction, please consider leaving a review on Apple Podcasts. Or share it with a friend who you think might learn something. It means the world to me, and it keeps this show going and building. All right, so let's make your kid rich. And ideally, still nice.

Number one, let's start with the simplest and sneakiest of the bunch, the Custodial Brokerage Account. This is the account you open for your child, but it legally belongs to your child. You, however, the benevolent parent that you are, get to make all the decisions up until they reach the age of majority, which is either 18 or 21 depending on your state of residence. At which point, they will gain full control, and you get to experience the unique joy of watching your thoughtful investments in Apple and index funds get cashed out for a Ford Bronco and a neck tattoo. Let me pause for a second, because this is the biggest hesitation I hear from parents. Namely, I don't want my kid getting access to that much money that early. And listen, I'm not here to judge your parenting. You're teaching style or your exact stance on when your child is allowed to date. But you're listening to an episode called How to Make Your Kid Wealthier Than You, not How to Withhold All Resources Until They're 50 and Still Living at Home Learning Latin. One of the main reasons young adults struggle with money is simple. We don't talk to them about it. It should be a wake up sign that you're more apt to talk to your kid about sex than money. Opening a custodial brokerage isn't just a financial move. It's a teaching mandate. You now have 18 to 21 years to make sure your child understands compound interest, delayed gratification, and what it means to steward wealth. And if they blow the money on something you wouldn't have chosen, well, that's the point. It's theirs, not yours. And naturally, this type of challenge to the custodial brokerage leads to most people's next question, which is, why bother with a custodial brokerage versus just investing in your own account and giving them gifts later? Well, because this is one of the only ways to give your kid some pretty direct exposure to the markets without their needing earned income. That's right, no lemonade stand required. You can contribute birthday checks, tooth fairy proceeds, or even your own money. Up to $19,000 per year in 2025 without triggering the gift tax. And yes, if grandma wants in, she gets her own $19,000 too to contribute. You can Voltron this thing into a serious nest egg very quickly. Then the money can be invested and grow in the market just like yours. You could buy ETFs, stocks, index funds, whatever suits your values and risk tolerance, or the values and risk tolerance that you agree on with your child as they grow and learn. And when your kid sells someday, they pay capital gains taxes based on their own tax bracket, not yours. And in 2025, the federal capital gains rate for someone earning under $48,350 is 0%. That's right. You might be handing your child the rarest substance in American finance, tax-free wealth, and they could use that money to supplement any lingering student debt or an apartment that doesn't rhyme with Dom's Dasement. Now for the cons. First, this isn't a retirement account. There's no tax deduction when you put the money in, and no protection from FAFSA. So if you're hoping this will boost your financial aid prospects, sorry, it won't. Custodial assets count against aid formulas more harshly than parental assets do. In 2025, they're assessed at 20% for FAFSA, compared to only 5.64% for parental holdings. Meaning, if your child has $10,000 in the account by the time they apply, $2,000 would be counted as custodial assets, versus if that $10,000 were in your brokerage account, only $564 would count as parental assets. That's a pretty big distinction. It's like the government somehow thinks an 18-year-old with $10,000 should fund their entire future with it. Doesn't make sense to me, but it's what it is.