Can You Invest in Stocks Under 18?

While minors generally cannot directly invest in stocks, established legal mechanisms allow adults to invest on their behalf. This ensures that young individuals can still benefit from market participation and long-term financial growth under proper supervision. Understanding these processes is important for anyone considering investing for a minor.

Legal Restrictions on Minor Stock Ownership

Individuals under the age of 18 typically lack the legal capacity to enter into binding contracts. This legal principle, often referred to as contractual capacity, means that minors cannot independently open brokerage accounts or directly purchase stocks. The restriction protects young individuals from entering into agreements they may not fully understand or that could lead to unfavorable financial consequences. Any contract a minor enters into is generally considered voidable, meaning the minor can choose to cancel it. Brokerage firms require individuals to be at least 18 years old to open an investment account. This legal framework necessitates alternative approaches for minors to hold investments.

Establishing a Custodial Investment Account

The primary method for minors to own stocks involves establishing a custodial account, most commonly through the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts are managed by an adult, known as the custodian, for the exclusive benefit of the minor beneficiary. The key distinction between UGMA and UTMA accounts lies in the types of assets they can hold; UGMA accounts are generally limited to financial assets like cash, stocks, and bonds, while UTMA accounts are broader and can include real estate and other tangible assets.

To open a custodial account, personal information for both the custodian and the minor beneficiary, including name, address, Social Security Number, and date of birth, is required. The custodian will also need to provide proof of identity, such as a driver’s license or passport. Brokerage firms provide forms to establish the account. Once established, the assets placed into these accounts are considered an irrevocable gift to the minor.

Managing and Distributing Custodial Account Assets

After a custodial account is established, the appointed custodian manages its operation. The custodian has a fiduciary duty to manage the assets prudently and solely for the minor’s benefit. This means the custodian makes all investment decisions, including buying and selling stocks, until the minor reaches the age of majority. The funds within the account must be used to directly benefit the minor, such as for educational expenses or extracurricular activities. However, these funds typically cannot be used for basic parental obligations like everyday living expenses.

When the minor reaches the age of majority, which is typically 18 or 21 depending on the state, or potentially up to 25 in some UTMA states, the custodianship terminates. At this point, the custodian must transfer control of all assets in the account directly to the now-adult beneficiary. The transfer process usually involves submitting specific forms and providing identification to verify the beneficiary’s age. Once the transfer is complete, the individual gains full control over the account, with the ability to use the funds for any purpose they choose.

Tax Implications of Minor’s Investments

Investment income generated within custodial accounts is subject to specific tax rules, governed by the “kiddie tax.” This tax prevents high-income individuals from shifting investment income to children to take advantage of lower tax brackets. The kiddie tax applies to a minor’s unearned income, which includes dividends, capital gains, and interest from investments.

For the 2025 tax year, the first $1,350 of a minor’s unearned income is tax-free. The next $1,350 is taxed at the child’s own tax rate. Any unearned income exceeding $2,700 is then taxed at the parent’s marginal tax rate.

If a child’s unearned income surpasses these thresholds, Form 8615 must be filed with the child’s tax return. In certain situations, parents may elect to report the child’s interest and dividends on their own return using Form 8814, provided specific conditions are met.