Acorns Early offers a simple way to invest in your child’s future. The UTMA/UGMA account allows proactive parents and guardians to create a savings account covering their child’s future expenses, like tuition and textbooks.
Acorns Early stands out from traditional 529 college savings plans because the child can use the funds for anything, not just educational expenses.
In this article, we’ll break down the pros and cons of opening an Acorns Early for your child so that you can make an informed decision about your kid’s long-term financial future. Here’s the inside scoop on Acorns Early.
What Type of Account Is Acorns Early?
Acorns Early contains a Uniform Gift to Minors Act (UGMA) and a Uniform Transfer to Minors Act (UTMA) account. The accounts exist in most states to help families save for their child’s future. The exceptions are Vermont and South Carolina, which do not permit UTMA accounts.
Think of UTMA and UGMA as the forerunners to the 529-plan college savings account. This plan’s name comes from Section 529 of the Internal Revenue Code established in 1996, authorizing tax-free status for “qualified tuition programs.”
Related: The Complete Guide to the Best 529 Plans by State
These custodial accounts give parents or guardians control over the funds until the child becomes a legal adult at 18 or, in some states, 21 and can access the money.
Acorns Early allows custodians to place various securities in a diversified portfolio. Some of the most common options include stocks, bonds, and mutual funds the account limits high-risk investments, such as buying on margin and options trading.
As a rule of thumb, a UTMA/UGMA account doesn’t offer the same financial aid benefits as a 529 plan. When your child fills out the financial aid paperwork, they must report any UTMA or UGMA accounts as assets. These accounts can reduce their financial aid by 20% of the account’s value, while a 529 plan only reduces it by 5.64%.
Acorns Early permits custodians to contribute up to $15,000 per year in after-tax dollars without paying a gift tax. That number doubles to $30,000 if you file your taxes jointly. The first $1,100 of your kid’s unearned income doesn’t mandate a tax, while everything over that amount uses a child’s tax rate.
Pricing
The Family Plan costs $5 per month and offers a comprehensive investing platform for families. You can set up separate sub-accounts for your children instead of creating multiple individual accounts.
Acorns allows users to create as many sub-accounts as they want on the Family plan. You won’t pay extra for additional users, either. Plus, you can manage the accounts from a single location, making it easy to set up recurring payments or earn bonus investments.
As the name suggests, the Family plan works for families. It takes a comprehensive investing approach, allowing each person to create customized portfolios under a single account.
The Family plan has some of Acorns’ most popular features, such as $5 recurring investments and complimentary financial literacy content. The key one is a UTMA/UGMA. The Acorn Early funds go toward anything benefitting the child when they grow up.
The Acorns Early account makes it simple to save on the things you already use and love. Acorns offers bonus investments and family-oriented savings through partners like ABC Mouse and Disney+. The plan even comes with a free children’s book to spark your kid’s interest in finance.
The Family plan makes sense if you’re an Acorns member and want to expand your number of accounts. Perhaps you gave birth to or adopted a child in the last year and want to start saving on their behalf. The option also makes sense if you prefer a UGMA over a 529 plan and enjoy Acorns’ financial literacy content.
What Is in an Acorns Early Portfolio?
Acorns Early lets your child hold a wide range of assets. While Acorns Early is a UTMA/UGMA account, the difference between the two types is worth noting. For instance, the two offerings come with different investment options.
A UGMA account only lets you invest in financial products. Think cash, stocks, bonds, mutual funds, and any other type of securitized assets. Additionally, all states accept UGMAs, while only 48 states accept UTMAs.
UTMAs enable custodians to invest in a broader range of assets, including private ones. For example, a parent might place their vehicle or a deed in the UTMA. The account can also handle various forms of real estate and property.
The specific assets will depend on your investing preferences, and Acorns gives you control over the assets based on your risk tolerance and interest. If you want an aggressive plan, you might have a mix of prominent international and domestic company stocks, with some real estate and emerging market stocks to round out your portfolio. However, if you want to play it safe, you can opt for low-yielding bonds.
Why Should I Open an Acorns Early Account?
Acorns Early sets kids up for future financial success. You don’t even need to invest a lot of money for them to develop a cushiony nest egg. Micro-investing stands out as one of the most effective ways to build wealth on any budget.
Related: Best Micro Investing Apps
Consider this example from the Acorns’ website. Let’s say you open an Acorns Early account on the day your child is born.
You decide to invest $5 per day with Acorns Early. If the market returns 8% on investment, your child would be a millionaire by 50, and that’s a conservative estimate too.
According to data from Goldman Sachs, the average stock market return over ten years is 9.2%. The S&P 500 has performed even better, appreciating 13.6% per year. Put another way: your child might become a millionaire even sooner than 50 with favorable market conditions.
Investing young also gives your child a chance to hedge risk over time. While financial setbacks such as the Great Depression and the Coronavirus Recession are inevitable, long-term investing can smooth out the bumps along the way. However, if a child’s investment portfolio leans too heavily on conservative assets, they’ll have to save more money because the account won’t grow as quickly.
As New York Times writer, Tara Siegel Bernard, puts it, “Younger people can generally afford to take more risks and invest more heavily in stocks — which have the potential to generate more growth over time — because they have many working years ahead of them. If the market tanks, their portfolio has time to recover.”
Adults don’t have the same luxury when investing. Savings for a down payment or car requires a less risky approach to investing. Adults might default to high-yield savings accounts and mutual funds to avoid losing their investment during a financial crash.
Related: How to Profit from a Stock Market Crash
Acorns understands kids won’t need to access their funds for years or even decades. This long-term perspective allows children to take advantage of competitive interest rates and maximize their return on investment. Even when the market delivers a temporary setback, the long-term benefits outweigh the short-term cons.
Potential Drawbacks of Acorns Early
The same tax benefits enticing some people to open an Acorns Early account can deter others. Beneficiaries pay a reduced tax rate for the first amount of money. Afterward, excess income falls under the parent’s marginal tax bracket. This change in tax rates doesn’t happen with 529 plans.
People with small balances might also feel the sting of account fees. While Acorns doesn’t charge as much as other platforms, it can make a noticeable dent if you’re a micro-investor. Imagine opening a family plan with a $100 balance. If you didn’t do anything else, $60 from that initial deposit would disappear in the form of monthly fees.
Acorns changes its fee structure for investors once they hit $5,000. Instead of charging $1 to $5 per plan, it requires paying 1.2% of the account balance. Still, the early fees can feel substantial relative to how much money you’ve set aside.
When Does the Account Go to My Child?
The rules for transferring your Acorns Early account to your child vary by state. Some places consider legal adulthood 18, while others say it’s 21. Once your growing child reaches the appropriate age, you can transfer the account into their name.
Some people prefer to make the transfer with custodian consent. This move allows the parents to retain some oversight of the account. A child can also remove the custodians from the account at the age of termination.
What Are the Tax Implications of Acorns Early?
Neither UGMA nor UTMA accounts has tax-deferred assets; the IRS taxes all the capital gains whenever the custodian realizes the returns on investment. Since parents and guardians create the account, they can also pay the capital gains taxes on their child’s behalf.
Acorns Early comes with some notable tax benefits, though that depends on whether you file your taxes with your child as a dependent. For example, the beneficiary will pay a lower tax rate on the account earnings in most cases. This benefit translates to significant tax savings since adults often pay taxes in a higher income bracket.
Alternatives to Acorn Early
529 College Savings Plan
A 529 plan offers a way for proactive parents to save for college. It allows them to make tax-deferred contributions for qualified higher education expenses, including student loans, textbooks, and apprenticeship programs.
Nearly every state has a 529 plan, though the details vary from state to state. Federal tax law endows parents with unique tax benefits, like qualified tax-free distributions and five-year gift tax averaging. The 529 plan also doesn’t have limits for income, age, or annual contributions.
The 529 plan requires the beneficiary to go to college to use the money with the maximum tax benefits. The child can still receive the money with a waived penalty if they earn a tax-free scholarship, go to the U.S. military, die or become disabled. Otherwise, the custodians must pay income tax on the earnings.
Coverdell ESA
Coverdell ESA functions as a trust or custodial account. Like a 529 plan, parents can only create them to pay for qualified education expenses, including college and elementary and secondary education costs.
The beneficiary must be 17-years old or younger for the parents or guardians to establish the account. All contributions must be in cash and are not tax-deductible. Many people prefer Acorns Early or a 529 plan because Coverdell ESAs have a maximum contribution of $2,000 per year.
What Else Is Offered by Acorns?
Acorns is much more than just Acorns Early. Acorns is an all-in-one financial app that includes many different solutions for managing and growing your money. Before we wrap up this article, we’ll outline some other features offered by Acorn’s platform so you can decide whether it’s for you.
Acorns Invest
Acorns Invest is likely the most popular part of Acorns overall platform. It’s a simplified investment account offering various tools for “automatically” investing and growing your money. You can opt-in to auto-invest sums of money (as little as $5) on a recurring basis, or whenever you feel like it. This “spare change”, as Acorns calls it, is put into a portfolio of ETFs, and diversified across more than 7000 stocks and bonds. Acorns will automatically adjust your portfolio based on your target allocation/your risk tolerance.
Basically, it’s a super simple investment account to automatically invest your “spare change.”
Acorns Later
Acorns Later is Acorns’ retirement account. It offers similar functionality to Acorns Invest, but the recurring payments are meant to help users save for retirement. When users sign up for Acorns Later, they’ll be prompted with a questionnaire to help set a payment schedule for meeting their retirement goals. Users can set and adjust these recurring contributions as they see fit.
Acorns Checking
Acorns checking is Acorns checking account and debit card, and comes with a heavy metal Visa debit card. It allows you to save & earn money as you spend it, with options to automatically invest spare change. It’s an FDIC-insured bank account for up to $250,000 with included fraud protection. There’s also no overdraft or minimum balances fees, and customers get free access to AllPoint ATMs.
You can access Acorns suite of financial resources via two different subscription tiers – Acorns Personal and Acorns Family. Acorns Personal costs $3/month, and is an all-in-one system offering Acorns Invest, Acorns Later, Acorns Checking, and more. Acorns Family is $5/month, and includes the features in Acorns Personal plus unlimited Acorns Early accounts per child.
What Are People Saying About Acorns?
To get a better idea of how customers are reacting to Acorns, it helps to look at some reviews. These reviews offer a non-biased perspective of Acorns, so you can decide whether it’s for you. Potential Acorns users will be happy to learn that reviews have been mostly positive.
Acorns has received an A+ rating from the Better Business Bureau. This represents the highest rating that the BBB can give based on its 100-point rating system. An A+ is reserved for a business that scores at or above 97/100, based on a multitude of factors that determine a business’s BBB ranking.
Business Insider also gave Acorns a positive review, touting their viability for investors who prefer a hands-off approach from start to finish. We agree with this assessment. Acorns is a good choice for those who want to automate their investment contributions, and also automate the way that their investments are managed – both for them and their children.
Final Thoughts
Acorns Early provides an affordable and effective way to save for your child’s future. Parents and guardians can open the UTMA/UGMA in less than five minutes and transfer the earnings once the kid becomes a legal adult. Acorns Early also comes with financial literacy content and automated investment tools to ensure your investments stay on track.
Sign up for Acorns or read our full review
Chris Muller
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He's also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter @moneymozartblog.
