Can You Invest Under 18? A Guide for Minors

Individuals under 18 typically cannot directly engage in investment activities. Legally, minors cannot enter into binding financial contracts, including opening brokerage accounts. This restriction exists to protect minors, recognizing they may not possess the legal capacity or experience to make complex financial decisions. However, while direct investment is not permissible, established legal mechanisms allow adults to invest assets on a minor’s behalf. These approaches ensure assets are managed appropriately until the minor reaches legal adulthood.

Understanding Investment Options for Minors

Investment options for minors primarily involve accounts managed by an adult. These accounts provide avenues for saving and investing for a minor’s future needs, such as college education or building wealth.

Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), are common. UGMA accounts are generally limited to holding financial assets like cash, stocks, bonds, and mutual funds. UTMA accounts, an extension of UGMA, offer greater flexibility by allowing a wider range of assets, including real estate, intellectual property, and artwork. In both types, an adult custodian opens and manages the account for the minor’s benefit. The assets held within these accounts are irrevocably owned by the minor, though the custodian maintains control until the minor reaches the age of majority, which varies by state.

Minors with earned income can also use custodial Individual Retirement Accounts (IRAs), either Traditional or Roth. These accounts operate under the same rules as adult IRAs, including annual contribution limits, but an adult manages them until the minor reaches legal age. For 2025, the annual contribution limit for a custodial IRA is $7,000, or the total amount of the minor’s earned income, whichever is less. This earned income can come from various sources, such as a part-time job or even cash earned from household chores, provided it is documented.

Another option for education savings is a 529 plan. These state-sponsored plans are designed to save for future education expenses. While a minor is typically the beneficiary of a 529 plan, an adult (often a parent or grandparent) remains the account owner and retains control. Contributions to 529 plans grow tax-deferred, and qualified withdrawals for educational expenses are generally federal income tax-free. Some states may also offer tax deductions for contributions to their plans.

Managing Minor Accounts

Once an investment account for a minor is established, the custodian primarily manages it. The custodian assumes a fiduciary duty to manage assets prudently and exclusively for the minor’s benefit. All investment decisions, from selecting securities to rebalancing portfolios, are made by the custodian until the minor reaches the age of majority.

The custodian’s control is not absolute. While managing investments, there are limitations on how funds can be used. Generally, assets in custodial accounts cannot be used for expenses that are considered a parent’s legal obligation, such as basic support, food, clothing, or shelter. Withdrawals must be for the minor’s benefit and adhere to guidelines to avoid tax or legal issues.

The minor, as legal owner, does not have direct control until reaching the age of majority. This age, also known as the “age of termination,” varies by state (typically 18 or 21). In some states, particularly for UTMA accounts, the age of termination can extend to 25. Upon reaching this age, assets in UGMA/UTMA accounts transfer to the minor, who then gains full control. Similarly, control of custodial IRAs transfers to the minor when they reach the age of majority.

Tax Implications of Minor Investments

Investment income from accounts held by minors is subject to specific tax rules, primarily the “Kiddie Tax.” This rule prevents families from lowering their tax burden by transferring income-generating assets to children, who typically have lower tax rates. The Kiddie Tax applies to a minor’s unearned income (dividends, interest, capital gains) if it exceeds a certain threshold.

For 2025, the first $1,350 of a child’s unearned income is generally tax-free due to the standard deduction. The next $1,350 is taxed at the child’s marginal tax rate. Any unearned income above $2,700 is taxed at the parent’s marginal income tax rate, which is typically higher. This rule applies to assets in custodial accounts, such as UGMA and UTMA accounts.

Certain investment accounts offer tax advantages that can mitigate the impact of taxation on a minor’s investments. Custodial IRAs provide tax-deferred growth for Traditional IRAs, meaning taxes are postponed until withdrawals in retirement. Roth IRAs, funded with after-tax dollars, offer the potential for tax-free growth and qualified withdrawals in retirement. Similarly, 529 plans offer tax-deferred growth and tax-free withdrawals when funds are used for qualified education expenses. Income from a 529 plan is not subject to the Kiddie Tax.