At What Age Can You Start Investing?

Investing involves putting money to work with the expectation of generating a return over time, allowing wealth to grow. Many individuals recognize the benefits of starting this process early, aiming to leverage time as a significant advantage. While there is a standard legal age for independently managing financial accounts, various structured mechanisms exist to begin investing for younger individuals, paving different pathways to wealth accumulation.

Understanding the Legal Age Threshold

In the United States, the legal age for entering into most contracts and independently opening financial accounts is 18 years old. At 18, individuals are deemed to possess the legal capacity to understand and accept contractual obligations and financial responsibilities. This legal framework provides protection for minors, ensuring they are not held accountable for financial decisions they may not fully comprehend. Before this age, minors are not considered competent to enter into binding contracts, including those for investment vehicles. While 18 is the age of majority in most states, legal emancipation can grant a minor adult rights, including financial independence, through a court process.

Investing Before Adulthood

For those under the legal age of majority, investing is primarily facilitated through custodial accounts established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts are designed to hold assets for a minor’s benefit, managed by an adult custodian until the minor reaches a specified age. Both UGMA and UTMA accounts ensure that the assets irrevocably belong to the minor once contributed, though the minor does not control them directly.

A key distinction between UGMA and UTMA lies in the types of assets they can hold. UGMA accounts are limited to cash and financial securities such as stocks, bonds, and mutual funds. In contrast, UTMA accounts offer broader flexibility, allowing for a wider range of assets, including real estate, intellectual property, and other tangible personal property, in addition to cash and securities.

The custodian, who can be a parent, grandparent, or another adult, is responsible for managing and investing the assets within the account with a fiduciary duty to act in the minor’s best interest. This includes making investment decisions, handling distributions, and ensuring proper record-keeping. The minor cannot direct investment decisions or access funds until reaching the age of majority, typically 18 or 21, depending on the state. Once the minor reaches this age, the custodian must transfer full control of the assets to them. While 529 plans also allow for saving for a child’s education with investment components, they differ significantly from UGMA/UTMA accounts as they are specifically for educational expenses and offer different ownership and tax characteristics.

Tax Implications for Young Investors

Investment income earned by minors is subject to specific tax rules, most notably the “Kiddie Tax.” The Kiddie Tax prevents higher-income individuals from reducing their tax liability by transferring income-generating assets to their children. This rule applies to unearned income, such as interest, dividends, and capital gains from investments, not to earned income from wages or salaries.

For the 2025 tax year, the Kiddie Tax thresholds dictate how a minor’s unearned income is taxed. The first $1,350 of a child’s unearned income is tax-free, covered by the standard deduction for dependents. The next $1,350 in unearned income is taxed at the child’s own marginal tax rate. Any unearned income exceeding $2,700 for the 2025 tax year is subject to the parents’ marginal tax rate, rather than the child’s lower rate. This means that significant investment earnings above this threshold can result in a higher tax burden than if they were taxed solely at the child’s rate.

Minors may be required to file a tax return if their unearned income surpasses certain limits. For 2025, if a child’s unearned income exceeds $1,350, they need to file a tax return. If the child’s unearned income is less than $13,500 and consists only of interest and dividends, parents may elect to report this income on their own tax return using IRS Form 8814, simplifying the filing process but potentially increasing their own taxable income. If the unearned income exceeds $2,700, IRS Form 8615 must be filed with the child’s tax return to calculate the tax liability based on the parents’ rate.

Starting Your Investment Journey

Beginning an investment journey involves several fundamental principles that apply regardless of age or the specific account type used. Cultivating financial literacy is an important first step, as understanding basic investment concepts equips individuals to make informed decisions. This foundational knowledge includes grasping how different asset classes work and the language of finance.

Setting clear financial goals provides a roadmap for investing, whether those goals involve long-term growth, saving for specific purchases, or funding future education. These objectives help determine the appropriate investment strategy, including the level of risk one is comfortable taking. Understanding personal risk tolerance, which is the willingness and ability to withstand potential losses in exchange for higher returns, is an important part of developing an investment approach.

The power of compound interest is a key concept that highlights the benefit of starting early. Compound interest allows earnings to generate additional earnings, leading to exponential growth over time. Diversification, the strategy of spreading investments across various asset types and sectors, helps manage risk by reducing exposure to any single investment. Consistent investing, such as making regular contributions, can also mitigate market volatility through dollar-cost averaging, where investments are made at regular intervals regardless of market fluctuations. Patience and a long-term perspective are also valuable, as market fluctuations are normal, and sustained growth often requires riding out short-term downturns.