Can You Buy Stocks at 17? Here’s How to Get Started

Many young people are interested in personal finance and direct stock ownership. Understanding the legal framework for minors is an important first step. This article will cover pathways for young individuals to engage with the stock market.

Understanding Age Requirements for Investing

Individuals under a certain age cannot directly engage in financial contracts, including opening brokerage accounts or purchasing stocks. This is because legal systems recognize that minors lack the full contractual capacity required to enter into binding agreements. The purpose of this legal principle is to protect young people from potentially unfavorable financial obligations.

Entering into a contract to buy or sell securities, or to open an investment account, requires legal consent and understanding that minors are generally presumed not to possess. Consequently, a brokerage firm cannot open an investment account directly in the name of someone who is 17 years old. This legal barrier prevents a minor from independently executing trades or managing a portfolio.

This protective measure ensures that financial commitments are only undertaken by individuals deemed mature enough to understand their implications. Without this legal capacity, direct participation in the stock market is not permitted for minors. Therefore, alternative structures are necessary for young people who wish to begin investing.

Investing for Minors Through Custodial Accounts

To enable minors to own investments, specific legal structures called custodial accounts exist. These accounts are established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Both acts provide a legal framework for an adult to manage assets for a minor.

In a custodial account, an adult, known as the custodian, manages the assets for the minor’s benefit. While the custodian controls the account, the assets legally belong to the minor from the moment they are contributed. The custodian is obligated to manage these assets prudently and in the minor’s best interest.

The primary distinction between UGMA and UTMA accounts lies in the types of assets they can hold. UGMA accounts typically restrict investments to financial assets such as securities, cash, and insurance policies. UTMA accounts offer broader flexibility, allowing for a wider range of assets, including real estate and other tangible property. Regardless of the specific act, the core principle remains that the minor is the beneficial owner, gaining full control upon reaching the age of majority.

Opening and Managing a Custodial Account

Establishing a custodial account involves gathering specific information and following an application process. The designated custodian must compile their personal details, including their full legal name, date of birth, Social Security Number, current address, and employment information. Similarly, the minor’s full legal name, date of birth, and Social Security Number are also required. These details are fundamental for identification and tax reporting purposes.

In addition to personal information, the custodian will typically need to provide a government-issued identification document, such as a driver’s license or passport, for verification. While less common, some institutions might request the minor’s birth certificate or Social Security card for initial setup. Most financial institutions, including online brokerage firms, traditional banks, and specialized investment companies, offer custodial accounts, providing various options for where to establish the account.

The application process for a custodial account often begins with completing an online or physical application provided by the financial institution. This form will request personal information for both the custodian and the minor. After submitting the application, the institution will review the details and verify the identities of the individuals involved.

Once the account is approved, the initial funding can be completed through various methods, such as electronic transfers from a linked bank account or by mailing a check. The custodian then assumes the responsibility for managing the account’s investments. This includes making all investment decisions, ensuring all actions are taken in the minor’s best financial interest, and maintaining accurate records of all transactions.

The custodian is tasked with selecting appropriate investments within the account, which commonly include individual stocks, mutual funds, and exchange-traded funds (ETFs). The custodian’s role continues until the minor reaches the age of majority, at which point control of the assets transfers directly to the now-adult individual. Throughout the account’s duration, the custodian must adhere to UGMA or UTMA guidelines, ensuring proper stewardship of the minor’s assets.

Tax Considerations for Minor’s Investments

Investment income generated within a custodial account is generally taxable to the minor, not the custodian. This includes income from dividends, interest, and capital gains. However, specific tax rules, often referred to as the “kiddie tax,” can affect how this income is taxed.

The kiddie tax rules apply when a minor’s unearned income exceeds certain thresholds. For example, for 2024, the first $1,300 of a minor’s unearned income is typically tax-free. The next $1,300 is taxed at the child’s tax rate. Any unearned income above $2,600 is generally taxed at the parent’s marginal tax rate, which can be significantly higher.

Custodial accounts require careful tracking of all income generated throughout the year. Financial institutions typically issue tax forms, such as Form 1099-DIV for dividends and Form 1099-B for proceeds from broker and barter exchange transactions, to report the minor’s investment income. If the kiddie tax applies, Form 8615 may need to be filed with the minor’s tax return. Consulting a qualified tax professional is advisable to navigate these rules and ensure proper compliance.

Transitioning Custodial Accounts at Adulthood

When the minor reaches the age of majority, the custodial account undergoes a significant change. The specific age at which this transition occurs varies by state, typically being 18 or 21, though for some UTMA accounts, it can be extended up to 25 if specified by the donor. At this point, the minor gains full legal control and ownership of all assets held within the account.

The process of transferring the assets typically involves the financial institution converting the custodial account into an individual brokerage account in the now-adult’s name. This often requires completing new account paperwork and providing updated identification information. The financial institution will guide the individual through the transfer.

Upon the successful transfer of assets, the custodian’s legal responsibilities and control over the account officially terminate. The former minor, now an adult, assumes complete authority over the investment decisions and management of the portfolio. This transition marks the culmination of the custodial arrangement, empowering the individual with direct financial autonomy.