Can Kids Buy Stocks? How Minors Can Invest

Minors often show an early interest in financial markets, but directly purchasing stocks presents legal challenges. While a child cannot independently enter into the contracts required to buy stocks, specific legal structures allow them to invest. These structures enable adults to manage investments on a minor’s behalf. The primary solution involves establishing custodial accounts, which facilitate a minor’s participation in the stock market.

Legal Framework for Minor Stock Ownership

Minors, typically individuals under 18, lack the contractual capacity to enter into legally binding agreements. This legal principle protects young individuals from unfavorable contracts due to their limited experience and maturity. Consequently, a minor cannot directly open a brokerage account or purchase stocks in their own name.

Any contract a minor enters is voidable at their discretion. This protective measure extends to financial transactions, preventing minors from being held accountable for investment decisions they might not fully comprehend. To circumvent this legal barrier and enable minors to hold investment assets, custodial accounts are necessary. These accounts establish an adult as a custodian who manages the assets for the minor’s benefit.

Types of Custodial Accounts

Custodial accounts provide the legal framework for minors to own investments, with two primary types: Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts. Both are established by an adult for a minor beneficiary, with the adult acting as the custodian managing the assets. The assets held within these accounts are irrevocably owned by the minor, though controlled by the custodian until the minor reaches the age of majority.

UGMA accounts typically hold financial assets such as cash, stocks, bonds, mutual funds, and insurance policies. All states have adopted the UGMA, making it a widely available option. UTMA accounts, an expansion of UGMA, offer broader flexibility. They allow a wider range of assets, including real estate, intellectual property, artwork, and other tangible property, in addition to financial assets. Most states, with the exception of Vermont and South Carolina, have adopted the UTMA. These accounts are generally opened through banks, brokerage firms, or mutual fund companies.

Managing and Transferring Custodial Assets

The custodian manages the assets within the custodial account until the minor reaches the age of majority. This includes making all investment decisions, which must always be in the minor’s best interest. While the custodian controls the account, the assets legally belong to the minor from the moment they are deposited, making the gift irrevocable.

Upon the minor reaching the age of majority (typically 18 to 21, depending on state law and account type), the custodian must transfer control and ownership of the assets to the now-adult beneficiary. This transfer marks the end of the custodian’s responsibilities, and the beneficiary gains control over how the funds are used. Financial institutions typically notify the custodian when the transfer needs to be initiated, and the process often involves opening a new brokerage account in the beneficiary’s name to receive the assets.

Tax Implications for Minor Investments

Investment income generated within custodial accounts is subject to specific tax rules, governed by the “kiddie tax.” This tax applies to a minor’s unearned income, such as interest, dividends, and capital gains from investments. The purpose of the kiddie tax is to prevent parents from shifting income to their children’s lower tax brackets to avoid higher parental tax liabilities.

For the 2025 tax year, the first $1,350 of a child’s unearned income is generally tax-free. The next $1,350 in unearned income is taxed at the child’s marginal tax rate. Any unearned income exceeding $2,700 is taxed at the parents’ marginal tax rate, which is typically higher. If the kiddie tax applies, Form 8615, “Tax for Certain Children Who Have Unearned Income,” must be filed with the child’s tax return. This form calculates the tax due on the unearned income, ensuring compliance.