Can a 16-Year-Old Invest in Stocks?

Can a 16-year-old directly invest in the stock market? Direct stock market participation by minors is generally not permitted due to specific legal restrictions. However, young people are not entirely excluded from the investment world. Various structured avenues exist that allow minors to engage with the stock market, providing them with opportunities to learn about investing and build assets for their future under adult supervision.

Age Requirements for Direct Investment

Minors cannot open their own brokerage accounts or purchase stocks directly. This limitation stems from the legal principle of contractual capacity, which dictates that a person must be of legal age to enter into binding agreements. Most states establish the age of majority at 18, although in some jurisdictions, it can be 21 years old. Brokerage firms and financial institutions must adhere to these age requirements, ensuring account holders have the legal capacity to understand investment contracts.

Contracts entered into by a minor are considered “voidable,” meaning the minor has the right to cancel the agreement before reaching the age of majority or shortly thereafter. This legal protection aims to shield minors from potentially unfavorable agreements they may not fully comprehend. Financial institutions avoid direct investment contracts with minors to mitigate the risk of disaffirmation.

Investing Through Custodial Accounts

While a 16-year-old cannot directly open an investment account, they can participate in the stock market through a custodial account, which is established and managed by an adult for the minor’s benefit. This arrangement bypasses the contractual capacity issue by placing legal control with a responsible adult. The two primary types of custodial accounts are Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. Both account types facilitate the transfer of assets to a minor without the need for a formal trust structure.

UGMA accounts are designed to hold financial assets such as cash, stocks, bonds, mutual funds, and life insurance policies. These accounts are available in all 50 states, offering a consistent framework for gifting financial assets to minors. In contrast, UTMA accounts offer broader flexibility, capable of holding not only financial assets but also physical assets like real estate, vehicles, intellectual property, and fine art. However, UTMA accounts are not adopted in every state.

Any adult can establish and act as the custodian for these accounts. Once assets are placed into a custodial account, the transfer is irrevocable, meaning the assets legally belong to the minor and cannot be reclaimed by the donor. The custodian is responsible for managing these assets prudently and in the minor’s best interest until the child reaches the age of majority. There are no annual contribution limits to these accounts, but contributions exceeding $19,000 for individuals or $38,000 for married couples in 2025 may be subject to federal gift tax rules.

Managing and Maturing Custodial Accounts

The adult custodian of an UGMA or UTMA account manages the assets to benefit the minor. This includes making investment decisions, maintaining records, and ensuring that any withdrawals are used solely for the minor’s welfare or educational expenses, not for typical parental support obligations. The custodian has a fiduciary duty, meaning they are legally bound to act with the highest degree of care and loyalty in managing the minor’s assets.

Custodial accounts have specific tax implications, particularly regarding the “kiddie tax.” Investment income generated within these accounts is taxed to the minor. The kiddie tax rules apply to unearned income, such as interest, dividends, and capital gains, of dependent children who are under 18 years old or full-time students under 24 years old, if their unearned income exceeds a certain threshold.

For the 2024 tax year, the first $1,300 of a child’s unearned income is tax-free, and the next $1,300 is taxed at the child’s own tax rate. Any unearned income exceeding $2,600 in 2024 is then taxed at the parents’ marginal tax rate. If these thresholds are met, parents need to file IRS Form 8615 to calculate the tax on the child’s unearned income.

The custodial arrangement concludes when the minor reaches the age of majority, which ranges from 18 to 21 years old, depending on the state where the account was established. Some states may allow for the custodianship to extend up to age 25. At this point, the assets are transferred to the now-adult beneficiary, who gains full control of the funds. The custodian’s role then ceases, and the former minor can use the assets for any purpose they choose.