I have two kids, aged 10 and 8, and unlike pretty much every other kid their age, they both take a keen interest in marketplace lending. And this is not just because their dad is heavily involved in the industry but because they both have Lending Club accounts in their own name.
I opened UTMA accounts at Lending Club late last year (more on UTMA accounts below) for both kids and transferred the money that was sitting in their savings account (earning less than 0.1% interest). They have been saving a minimum of $1 a week from their allowance as well as a large portion of any gifts they receive from their grandparents. We track these amounts and then contribute new money to Lending Club 2-3 times a year. Now, my son will often say on allowance day, “Just put it all in Lending Club this week”. My daughter likes to spend her money so she usually just does the minimum.
So, what are the investment options for kids? I have written over 1,000 articles on Lend Academy since 2010 and have never discussed this topic so here goes.
What are UTMA Accounts?
The Uniform Gifts to Minors Act (UGMA) allows minors to own property such as securities without the aid of a guardian or trustee. The similarly named Uniform Transfers to Minors Act (UTMA) simply expands the kinds of assets that minors can hold to include real estate, art, royalties and other esoteric assets.
You can use these accounts when you want to transfer or gift money to your children. These gifts are irrevocable and when the recipient turns 18 or 21 they gain complete control over these assets. The first $1,050 of unearned income on these accounts are tax free and the next $1,050 are taxed at the child’s rate. So, you can get to a decent sized account before taxes become an issue.
What About Saving for College?
I have also funded a 529 plan for both my kids but unfortunately that has been done outside of the marketplace lending industry. Both have age-based portfolios with Vanguard that are a mix of stocks and bonds. Unfortunately, there are no options for 529 plans where you can invest in marketplace lending.
The same goes for Coverdell Education Savings Accounts. These accounts are another good option for parents trying to save money for college as all earnings grow tax free. But again this is not an option offered by any marketplace lending platform.
The Lending Club UTMA is the Only Game in Town
There is a reason I opened UTMA accounts for my kids at Lending Club. They are the only platform that offers these accounts as an option. I checked again with Prosper yesterday and they confirmed that you need to be at least 18 years old to open an account there. I researched several other accredited investor platforms and again came up blank as far as any account that can be held in a minor’s name.
It is a shame that there is still very little choice in marketplace lending for non-accredited investors. It is an even bigger shame that only one platform is encouraging kids to invest. I know my kids didn’t get excited when they see they earned pennies in interest on their savings each month. When I login to their Lending Club accounts today they see that they have earned real money. A hundred dollars in interest is a huge amount to a kid and helps stimulate a useful discussion about money and the wonderful power of compound interest.