How Can Minors Invest in the Stock Market?

Investing in the stock market for minors presents an opportunity to foster financial literacy and build wealth from an early age. Legal restrictions prevent individuals under 18 from directly owning investment accounts. Adults must establish and manage accounts as custodians until the child reaches legal adulthood, allowing for investment growth and financial education.

Understanding Custodial Investment Accounts

Custodial investment accounts, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), are common vehicles for minors. These accounts are an irrevocable gift to the minor; assets legally belong to the child and cannot be reclaimed by the donor. The custodian, usually a parent or guardian, manages these assets in the minor’s best interest until they reach the age of majority.

The age of majority, when the minor gains full control, varies by state (18-21, some up to 25). UGMA accounts hold financial assets (cash, stocks, bonds, mutual funds), while UTMA accounts allow broader assets (real estate, art, intellectual property). Funds must be used for the minor’s benefit but generally cannot be used for basic parental obligations like everyday living expenses.

Opening a custodial investment account requires the minor’s full legal name, date of birth, and Social Security number. The custodian also needs to provide their full legal name, date of birth, Social Security number, address, and contact information. Accounts are commonly opened through brokerage firms or financial institutions, often online. The custodian completes and submits the necessary forms. Once established, the custodian deposits funds and makes investment decisions.

Custodial Retirement Accounts

Minors with earned income can open Custodial Roth or Traditional Individual Retirement Accounts (IRAs). These accounts offer tax advantages for long-term savings. A minor must have earned income to contribute to a custodial IRA.

Earned income, as defined by the IRS, includes taxable wages or self-employment income (e.g., babysitting, dog walking, lawn mowing). Gifts, allowances, or unearned income from investments do not qualify for IRA contributions. For 2025, the annual contribution limit for both Roth and Traditional IRAs is $7,000 for individuals under age 50, or 100% of the minor’s earned income, whichever amount is less.

Custodial Roth IRAs are attractive for minors because after-tax contributions allow qualified withdrawals in retirement to be tax-free. Contributions can be withdrawn tax-free and penalty-free at any time. Earnings can be withdrawn tax-free for specific purposes, such as up to $10,000 for a first-time home purchase (after five years) or for qualified education expenses (though earnings may be taxable).

Establishing a custodial IRA requires similar personal details as general investment accounts. Accounts are typically opened through brokerage firms or financial institutions. The custodian submits the application, then manages investments and contributions. Funds legally belong to the minor for their future benefit.

Choosing Investments and Managing Accounts

Once a custodial account is established, selecting appropriate investments and managing the account effectively is next. These accounts can hold various investment vehicles. Common options include stocks; exchange-traded funds (ETFs), which are collections of securities that trade like individual stocks; and mutual funds, professionally managed portfolios.

The custodian makes all investment decisions, including choosing investments, monitoring performance, and making adjustments. Decisions should align with the minor’s long-term interests and the account’s purpose. A long-term investment horizon is appropriate, allowing for growth.

Diversification, spreading investments across asset classes and sectors, helps manage risk. Custodians should consider a diversified portfolio to reduce the impact of poor performance from any single investment. Highly speculative investments like trading on margin or derivatives are generally not permitted. Ongoing management ensures assets are appropriately invested and aligned with the minor’s financial goals.

Tax Rules for Minor’s Investments

Investment income in custodial accounts is subject to the “Kiddie Tax.” This rule applies to unearned income (interest, dividends, capital gains) above a certain threshold. The Kiddie Tax exists to prevent individuals from shifting investment income to their children to take advantage of lower tax brackets.

For 2025, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 is taxed at the child’s rate. Unearned income exceeding $2,700 is taxed at the parent’s marginal tax rate. The Kiddie Tax generally applies to dependent children under age 19, or full-time students under age 24 if their earned income does not exceed half of their support.

If a minor’s unearned income exceeds $2,700, they may need to file their own tax return (Form 1040) and attach IRS Form 8615 to calculate tax based on the parent’s rate. Alternatively, if the child’s gross income is less than $13,500, parents can include the child’s interest and dividends on their own tax return (IRS Form 8814), though this might increase the parents’ taxable income.

Custodial Roth IRAs have specific tax implications. Contributions are made with after-tax dollars and are not tax-deductible. Investment growth and qualified withdrawals in retirement are tax-free. Unlike general investment accounts, assets in retirement accounts typically do not count towards financial aid calculations for college.