Can You Invest Under 18? Here’s How It Works

Investing can be a powerful tool for building financial security and achieving long-term goals. While individuals under 18 face restrictions when opening and managing investment accounts directly, legal frameworks provide avenues for them to participate in markets. These structures allow assets to be held and managed on a minor’s behalf, fostering financial growth and education.

Understanding Legal Limitations for Minors

Individuals under the age of 18 cannot open their own brokerage accounts due to contractual capacity. The “age of majority,” which is 18 in most U.S. jurisdictions, dictates when an individual is legally considered an adult capable of binding agreements. Financial institutions require account holders to be of legal age to ensure the enforceability of contracts, such as brokerage account terms of service.

Minors are protected by law from entering into contracts, which are often considered “voidable” at the minor’s discretion. This means a minor can choose to cancel an agreement before reaching adulthood or shortly thereafter. This legal protection, while safeguarding minors, prevents them from independently managing complex financial instruments that involve contractual obligations.

Custodial Investment Accounts

Custodial accounts provide a structured solution for investing on behalf of a minor, with the most common types established under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). These acts allow adults to transfer assets to a minor without the need for a formal trust, simplifying the process of gifting and investing. The assets held within these accounts are irrevocably owned by the minor, meaning that once funds or investments are contributed, they legally belong to the child and cannot be reclaimed by the custodian or donor.

A designated adult, known as the custodian, manages the account and makes investment decisions in the minor’s best interest. This role involves overseeing the investments and ensuring that any withdrawals are solely for the benefit of the minor. When the minor reaches a specific age, typically between 18 and 21, or up to 25 in some states for UTMA accounts, control and full ownership of the assets must be transferred to them. UGMA accounts are generally limited to financial assets like cash, stocks, bonds, and mutual funds, while UTMA accounts offer broader flexibility, allowing for a wider range of assets including real estate, intellectual property, and artwork.

Setting Up and Managing Custodial Accounts

Opening a custodial account, such as a UGMA or UTMA, involves selecting a brokerage firm that offers these account types. The process requires specific information for both the minor and the designated custodian. For the minor, this includes their full legal name, date of birth, and Social Security number. The custodian will need to provide their full legal name, address, Social Security number, and contact information.

Once a brokerage is chosen, the custodian completes an application, which can be done online or by submitting physical forms. This application will require the previously gathered details and may involve initial funding of the account. The custodian is responsible for all ongoing management, including making investment decisions, placing trades, and maintaining accurate records. The custodian must ensure all investment activities and distributions from the account are exclusively for the minor’s benefit. Upon the minor reaching the age of majority, the custodian is obligated to transfer control and ownership of the account assets to the now-adult beneficiary.

Tax Considerations for Minor Investments

Investments held in a minor’s name are subject to specific tax rules, most notably the “Kiddie Tax,” which aims to prevent parents from shifting income to children to exploit lower tax brackets. This tax applies to a minor’s unearned income, such as interest, dividends, and capital gains, once it exceeds certain thresholds. For the 2024 tax year, the first $1,300 of a child’s unearned income is generally tax-free, and the next $1,300 is taxed at the child’s own rate. Any unearned income exceeding $2,600 for 2024 is then taxed at the parents’ marginal tax rate, which is typically higher than the child’s rate.

The Kiddie Tax applies to dependent children under 19, or full-time students under 24, who do not have earned income exceeding half of their support. While the minor is the owner of the assets, the custodian plays a role in providing necessary tax information to the minor or their tax preparer. If the Kiddie Tax applies, Form 8615, “Tax for Certain Children Who Have Unearned Income,” must generally be filed with the child’s tax return. Alternatively, if specific conditions are met, parents may elect to include the child’s interest and dividends on their own tax return using Form 8814.