Practice Squad
I have a couple different things on my mind this week. [1] They seem unrelated — custodial accounts for your child, the South Korean stock market — but they are both occupying the same headspace at the moment.
First, custodial accounts. A common client question is, “Should I set up an investment account for my child?” The vehicle in mind is the UTMA account. (UTMA stands for Uniform Transfers to Minors Act.) An UTMA account is set up by a parent, who acts as the custodian of the account, for the benefit of their child. Since I began as a financial coach a few years ago, I have been a bit of an UTMA skeptic. But just lately, I have been having a bit of a re-think. And that reconsideration has to do with the South Korean stock market, as I will explain later.
First, a few of the basics. Funds in an UTMA can only be used for the sole benefit of your child. It is the lockiest of lock boxes. This has always been one of my key reservations about this type of account. You lose your job; your rent is due. Sure would be nice to tap into that UTMA to keep a roof over yours and your child’s head. But you can’t.
My other reservation is that control of the account reverts automatically to your child at the age of 18 or 21, depending on your state. You may envision this as a college fund; Junior may envision a motorcycle. But TBH, if the balance of the account is not terribly large, then I am not sure how much of a demerit this really is.
The attraction some people have to UTMAs is that there is potentially a tax benefit to holding investments in an UTMA versus the parent’s investment account.[2] This is because the investment returns, up to a point, are taxed at the child’s tax rate which is presumably lower than the parent’s, perhaps even zero. Honestly, I think that the real world tax advantage of an UTMA account is almost always less than life changing.
But why am I now changing my tune a bit, and thinking that maybe I have unfairly slandered the UTMA account? That brings me to the South Korean stock market.
The South Korean stock market has been a mass of jangled nerves lately, due to trading in leveraged ETFs (exchange traded funds). So, they decided to do something about it.
Quoting from a recent Money Stuff (by Bloomberg’s Matt Levine) newsletter: "Key to sapping demand has been a series of regulatory tightening moves, most recently a rule to complete five-day simulated trading. Investors must download a Windows-only program on PCs and spend at least an hour a day learning the ropes — and the risks — of leveraged trading with virtual cash."
Imagine if the next time someone said that they were going to make their riches day-trading leveraged securities, they were required to actually try it out before they were allowed to start. And that is what led me to rethink UTMA accounts.
One of the reasons I often hear for starting an UTMA account is the desire to teach youngsters about investing. Now, you and I know full well that successful investing is as dull as sand. Buy a low cost, diversified index fund and leave it alone. But that’s not going to get your 14-year-old to put down their Madden NFL 2026 console.
So, what if you use that UTMA account as their practice account ala South Korea? Yes, choose an index fund for most of the balance (because you are the custodian, after all). But give your child free rein for part of the balance, choosing individual stocks that entice their interest. As much as I generally dislike investing in individual companies for most adults, for a minor (with little at stake) this could be a great way to interest them in investing…and likely see that over time, a boring index fund is just fine.
(Hey, I’d love to be in touch regularly. My free newsletter contains this blog, as well as other articles written by myself and others. Please consider subscribing by visiting the MoneyByLisa home page.)
[1] Untrue. I actually only have one thing on my mind: the NFL season.
[2] UTMA versus a 529 account is a different story.