By Dr. Jim Dahle, WCI Founder

Fidelity has started offering a “youth account,” and some WCIers are wondering if it is a good idea for their teenager. The TLDR answer is “probably not,” but it's fine to put a little bit of money in there.

Still, let's talk a little more about a Fidelity Youth Account and what you should consider if you're thinking about opening one.

 

What Is the Fidelity Youth Account?

The Fidelity Youth Account is a fully taxable brokerage account owned by a 13- to 17-year-old. The account can be opened with as little as $1, and there are no fees to open it. Parents must open the account, can add money to (but not withdraw money from) the account, and must have an existing account with Fidelity themselves. The teen then controls the account, but parents (well, one parent) get visibility into what they are doing.

The teen can essentially invest in most of what a brokerage account is typically invested in, including the government money market fund (yielding 3.93% on the day I wrote this). The account can have a debit card associated with it. It then gets converted to a regular brokerage account at age 18. There is a $30,000 annual limit on contributions. It seems most contributions are transfers from the parents' Fidelity account, but checks can be deposited into the account by the teen and direct deposits from their job can also go there. The teen cannot gift money from the account, and daily debit card transaction amounts are limited.

 

What Are the Investing Limitations?

Per Fidelity, the account can be invested in the following:

  • Fidelity mutual funds
  • Most US stocks
  • Some Exchange-Traded Funds (ETFs)
  • REITs
  • Some international equities

However, teens cannot invest in the following:

  • Third-party mutual funds
  • Corporate bonds
  • Municipal fixed income securities
  • Certificates of Deposit (CDs)
  • Treasuries
  • Convertibles
  • Leveraged and inverse ETFs
  • Cryptocurrencies
  • FILI insurance products
  • Penny stocks (stocks valued at $5 per share or less)
  • Foreign currencies

Additionally, teens cannot engage in options, margin trading, or short selling, and they can't participate in a company's IPO. Note that most ETFs are allowed, but leveraged and inverse ETFs and Bitcoin ETFs are specifically excluded. These can be bought in a UTMA.

More information here:

Why a 13-Year-Old Has More Investing Accounts Than You

What We Learned Financially from Our Parents and How We’re Passing It on to the Next Generation

 

How Is This Different from a UTMA?

The first question most informed investors ask when they hear about this account is, “How is this different from a Uniform Gift to Minors (UGMA) or Uniform Transfer to Minors (UTMA) account?” The main difference between the teen account and a UTMA account is ownership and control. A UTMA is a custodial account. The money in it belongs to the minor, and it can only be spent in a way that benefits the minor. But the minor has no control over it until reaching a certain age (21 in most states). With the Fidelity account, the parent has limited control over it, and they, in fact, CANNOT transact in the account or withdraw money from it. It's the teen's account now instead of later. The parent CAN close the account completely and cancel the debit card, though. In addition, as noted above, investment options are more limited in the Youth Account.

 

How Are These Accounts Taxed?

These accounts are taxed exactly like a UTMA. That is to say, the “Kiddie Tax” and gift tax limits still apply. When it comes to unearned income, a minor pays no tax at all on the first $1,350 (2025) in income and then pays tax at their own tax rate (probably 0% if qualified dividends, but typically no more than 10% on ordinary income) on the next $1,350. After $2,700 (2025) in income, additional income is taxed at the adult's tax rate. So, if this account is big enough or the youth has other unearned income, their transactions could theoretically increase your tax bill.

 

What Is the Deal with the App?

The account comes with the Fidelity Youth App, which the teen can put on their phone. They use the app to do all their transactions. Teens can use the app to request money from their parents, too (which has to be transferred in from the parents' Fidelity account). The parent can also use the app to make regular “allowance” transfers to the teen.

More information here:

Is Greenlight the Best Debit Card to Help Your Kids Learn Finance?

Venmo Teen Account and How to Use It

 

What Are the Pros of Using a Fidelity Youth Account?

There are some benefits of using a Fidelity Youth Account. The first is that it is probably a more effective teaching instrument than a UTMA. The kid is going to learn better how to invest if they can and have to do everything themselves. They will feel more trusted and more in control of their own money. It will probably also allow them to earn more on their savings than they will get at a local bank or credit union.

 

What Are the Cons of Using a Fidelity Youth Account?

The main downside is that the frontal cortex is not fully developed until age 25. Young people do stupid things, especially teenagers. How much money do you really want a 14-year-old to control—especially when their actions can start affecting not only their tax bill, but yours? Plus, it's just one more financial account to manage. Teens tend to ignore things that are not important to them, and plenty of them may learn very painful lessons at a young age that will affect future financial and investing behavior. The last thing you want to do is put a fear of investing into your teen that lasts throughout their life. Who needs any more pressure as a teenager?

 

Why Does Fidelity Offer This?

Well, Fidelity wants to help your teen become savvy about investing. And of course, it wants to manage more money and generate fees from it, and it especially knows that inertia is real and that someone who starts investing at Fidelity is likely to remain there for their entire life.

 

Will You Be Using a Fidelity Teen Account?

No, we do not plan to open Fidelity Teen Accounts for our kids. They already have plenty of accounts. Their “20s fund” consists of the following:

We think that's enough to teach them about money.

More information here:

How to Open a Roth IRA for Your Kids (and Should You)?

Teaching Your Kids About Investing with The Stock Game

 

Is It Nuts to Use a Fidelity Youth Account?

No. If this sounds like a great way to teach your kid about money, feel free to open an account. You can put a little money in there yourself and let them put their own gift and earned money into it. The allowance feature can be particularly useful. The account can be a particularly good thing if they are already interested in money and investing.

What I would NOT do, however, is put $50,000 or $100,000 in there like I might with a UTMA. If you want to put a couple thousand dollars in there and let it grow to a four-figure or even low five-figure amount, that's fine. But for larger sums of money that you want them to have access to in their 20s, I would still use a UTMA. A Roth IRA is still a much better long-term account for their earned money being saved for retirement. And a 529 is much better for college savings (and you can remain the owner of that account even after age 21). For money that will be used by them that you wish to control long-term, you would still want some sort of trust.

What do you think? Does your teen have a Fidelity Youth Account? What do you like/dislike about it? Would you consider opening one of these instead of or in addition to a UTMA account? Why or why not?