Can a Kid Invest in Stocks? How to Get Started

Minors cannot directly invest in stocks or open brokerage accounts in their own name due to legal limitations. They are generally not considered to have the legal capacity to enter into contracts, a fundamental requirement for financial transactions. However, specific legal mechanisms allow adults to invest on behalf of a minor, providing avenues for younger individuals to begin investing. These methods ensure investments are managed responsibly until the minor reaches legal adulthood.

Investment Avenues for Minors

Investing for a minor typically involves establishing a custodial account, managed by an adult on the child’s behalf until they reach a specified age. The two primary types are Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts. In both, the assets legally belong to the child from the moment of contribution.

A key distinction between UGMA and UTMA accounts lies in the types of assets they can hold. UGMA accounts are limited to financial assets such as cash, stocks, bonds, and mutual funds. In contrast, UTMA accounts allow a wider range of assets, including real estate, intellectual property, and artwork. The age at which the minor gains control of the assets varies by state, typically ranging from 18 to 21 years old.

Beyond general investment accounts, custodial Individual Retirement Arrangements (IRAs) allow minors to save for retirement. These accounts, which can be either Roth or Traditional IRAs, are for minors with earned income. Contributions cannot exceed the minor’s earned income for the year or the annual IRA contribution limit, whichever is less. In 2025, the IRA contribution limit for individuals under age 50 is $7,000.

Custodial Roth IRAs provide tax advantages, as contributions are made with after-tax dollars, allowing for tax-free growth and qualified withdrawals in retirement. Conversely, Traditional IRAs for minors offer tax-deferred growth, meaning taxes are paid upon withdrawal. Both types of custodial IRAs are managed by an adult custodian, similar to UGMA/UTMA accounts, until the minor reaches the age of majority.

Setting Up and Managing Minor Investment Accounts

Establishing an investment account for a minor begins with an adult, typically a parent or guardian, choosing a financial institution that offers custodial accounts. The custodian opens the account, providing necessary documentation for both themselves and the minor, such as Social Security numbers and birthdates. Anyone can contribute funds. While UGMA/UTMA accounts have no statutory contribution limits, gifts exceeding the annual federal gift tax exclusion amount ($19,000 per recipient for 2025, or $38,000 for married couples making a joint gift) may trigger gift tax reporting for the donor.

The custodian assumes a key role in managing the account, acting with a fiduciary duty to make investment decisions solely for the minor’s benefit. This involves selecting appropriate investments, including assets like mutual funds, exchange-traded funds (ETFs), and individual stocks. The custodian also oversees the portfolio, reallocating investments as needed based on the minor’s financial goals and risk tolerance. Once assets are contributed to a custodial account, they irrevocably become the property of the minor, and the custodian cannot reclaim them or change the beneficiary.

Withdrawals from custodial accounts before the minor reaches the age of majority must be for the minor’s benefit, covering expenses such as education, medical costs, or extracurricular activities. Using funds for general parental support obligations, such as basic necessities, is generally not permitted and can have adverse tax implications. Upon the minor reaching the age of majority, which typically occurs between 18 and 21 years old depending on the state, the custodian is required to transfer control of the assets to the beneficiary. This transfer process usually involves completing specific paperwork with the financial institution and providing proof of the minor’s age, such as a birth certificate or government-issued ID.

Tax Considerations for Minor Investments

Investments held in a minor’s name are subject to specific tax rules, most notably the “Kiddie Tax.” This tax aims to prevent high-income individuals from reducing their tax burden by shifting investment income to children who would typically be in a lower tax bracket. The Kiddie Tax applies to a minor’s unearned income, which includes dividends, interest, and capital gains from investments.

For the 2025 tax year, the first $1,350 of a child’s unearned income is generally tax-free. The next $1,350 is taxed at the child’s own tax rate. Any unearned income exceeding $2,700 for 2025 is then taxed at the parent’s marginal tax rate. This rule applies to dependent children under age 18 at the end of the tax year, or full-time students younger than 24, provided they do not provide more than half of their own support.

Common taxable events within custodial accounts include dividends, interest, and capital gains from sold investments. Both short-term capital gains (assets held for one year or less) and long-term capital gains (assets held for more than one year) are subject to taxation. The responsibility for reporting this income falls on the custodian. Relevant tax forms include Form 1099-DIV for dividends, Form 1099-INT for interest, and Schedule D for capital gains and losses. If the Kiddie Tax applies, Form 8615 must be filed. Alternatively, if the child’s gross income is below a certain threshold (e.g., $13,500 for 2025), parents may elect to report the child’s interest and dividends on their own tax return using Form 8814.

Assets in a minor’s name, including those in UGMA/UTMA accounts, can impact eligibility for college financial aid. These assets are assessed at a higher rate than parental assets when calculating expected family contributions for federal student aid, such as the Free Application for Federal Student Aid (FAFSA). Student assets in custodial accounts can reduce need-based aid eligibility by as much as 20% of the asset’s value, compared to a maximum of 5.64% for parental assets.

Despite potential Kiddie Tax implications, custodial Roth IRAs offer tax benefits. Contributions are made with after-tax dollars, meaning qualified withdrawals in retirement, including contributions and earnings, are tax-free. Contributions to a Roth IRA can also be withdrawn at any time, tax-free and penalty-free. Earnings may be withdrawn tax-free and penalty-free for qualified distributions, such as a first home purchase up to $10,000, after the account has been open for at least five years.