Can You Invest in the Stock Market Under 18?

Investing in the stock market can be a valuable way to build wealth. While minors (under 18) generally cannot directly open or manage brokerage accounts due to legal limitations, adults can invest on their behalf. This fosters financial literacy and long-term growth through specific account structures designed to protect the minor’s interests.

Understanding Legal Restrictions for Minors

Direct stock market participation requires contracts with brokerage firms, which minors typically lack the legal capacity to do. Most U.S. states set the age of majority at 18, though some are 19 (Alabama, Nebraska) or 21 (Mississippi). Contracts made by individuals below this age are generally voidable at the minor’s discretion. This legal protection safeguards minors from unfavorable financial decisions. Without the ability to form binding agreements, minors are prevented from directly engaging in activities like opening investment accounts or executing trades.

Investing Through Custodial Accounts

Custodial accounts, specifically Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, allow adults to invest on behalf of a minor. These accounts transfer assets to a minor without needing a complex trust. The adult establishing the account acts as the custodian, managing investments for the minor’s benefit.

UGMA and UTMA accounts differ in the types of assets they can hold. UGMA accounts are limited to financial assets like cash, stocks, bonds, and mutual funds. UTMA accounts offer broader flexibility, allowing for real estate, intellectual property, artwork, and other tangible property, in addition to financial assets. While UGMA accounts are available in all 50 states, UTMA accounts are not adopted in Vermont and South Carolina.

Assets in a custodial account are an irrevocable gift to the minor, legally belonging to them and not reclaimable by the custodian. The custodian manages these assets prudently, making investment decisions and using funds only for the minor’s benefit.

Once the minor reaches the age of majority, the custodian must transfer full control of the account. This age varies by state, typically 18 to 21, though some states permit extensions up to 25. After transfer, the former minor has complete, unrestricted control over the funds. This lack of control over the funds’ use after transfer is a characteristic of custodial accounts.

Contributions to UGMA/UTMA accounts are made with after-tax dollars and are not tax-deductible for the donor. For 2025, individuals can contribute up to $19,000 ($38,000 for married couples filing jointly) without federal gift tax. Income generated is generally subject to “kiddie tax” rules.

For 2025, the first $1,350 of a child’s unearned income (including investment gains) is tax-free. The next $1,350 is taxed at the child’s lower rate. Unearned income exceeding $2,700 is taxed at the parent’s marginal rate. These rules apply to children under 18, or under 24 if full-time students not providing over half their own support. The minor’s Social Security Number is used for tax reporting.

Custodial accounts can impact financial aid eligibility for higher education. Since UGMA/UTMA assets are legally owned by the minor, they are assessed at a higher rate (up to 20% of their value) when calculating expected family contribution. This contrasts with parent-owned assets, which are assessed at a lower rate, capped at 5.64%.

Exploring Other Investment Avenues

Beyond custodial accounts, other structures facilitate wealth transfer and investment for minors, serving different purposes. A prominent option is the 529 plan, designed for education savings. These state-sponsored plans allow funds to grow tax-free, and withdrawals are also tax-free when used for qualified education expenses.

Qualified expenses include tuition, fees, room and board, books, and supplies for college or graduate school. They also cover up to $10,000 annually for K-12 tuition, registered apprenticeship programs, and up to $10,000 in lifetime student loan repayments.

Unlike custodial accounts, the adult establishing the 529 plan retains control as the account owner. Recent changes allow rolling over up to $35,000 in unused 529 funds to a Roth IRA for the beneficiary, if the 529 account has been open for at least 15 years.

A more complex option for managing minor assets is a trust. This legal arrangement allows an individual to set aside assets for another person, managed by a designated trustee. Trusts offer greater control over asset distribution than custodial accounts, potentially holding assets until the minor is older than the typical age of majority. This can prevent a young adult from receiving a large sum before financial maturity.

Trusts can also provide income, estate, and gift tax benefits, and are highly customizable. However, establishing and administering a trust involves more legal complexities and ongoing costs than a custodial account. Common types include Section 2503(c) and Section 2503(b) trusts, each with specific rules for income distribution and termination age.

Steps for Setting Up a Minor’s Investment Account

Establishing a custodial investment account involves several steps. First, select a brokerage firm offering UGMA or UTMA accounts, such as Fidelity, Vanguard, Charles Schwab, or E-Trade. Provide specific information for both the custodian and minor, including Social Security Numbers and identification.

After establishment, fund the account with cash or existing securities. Custodians can then choose from investment products like individual stocks, bonds, mutual funds, and ETFs. Some brokerages offer fractional shares.

While the custodian manages the account, involving the minor in the learning process is beneficial. This includes discussing investment goals, reviewing statements, and explaining investment performance. This engagement helps the minor understand financial markets and money management, preparing them for when they take control of assets.