How Can You Start Investing as a Minor?

Starting to invest early can significantly benefit a minor’s financial future through the power of compounding. While direct independent investment accounts are generally not accessible to individuals under the age of majority, adults can establish accounts on their behalf. This approach provides a financial head start and offers an opportunity for financial education, helping to build substantial wealth over decades.

Understanding Account Options for Minors

Several investment vehicles cater specifically to minors, each with distinct features. Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are common custodial accounts. These accounts allow an adult, known as the custodian, to manage assets for the minor until they reach the age of majority, typically 18 to 21 years old, depending on the state. UGMA accounts generally hold financial assets like cash, stocks, bonds, and mutual funds, while UTMA accounts offer broader flexibility, allowing for physical assets such as real estate, artwork, or intellectual property. Once contributions are made, they become the irrevocable property of the minor.

A Custodial Roth IRA can be opened for a minor with earned income. These accounts offer tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met. For 2025, the maximum contribution to a Roth IRA for an individual under 50 is $7,000, or up to 100% of the minor’s earned income, whichever is less. Contributions are made with after-tax dollars.

For education-specific savings, 529 plans help families save for qualified education expenses. While contributions are not federally tax-deductible, earnings grow tax-free, and withdrawals for qualified educational costs are also tax-free at the federal level. Many states offer income tax deductions or credits for contributions to their own 529 plans.

Opening a Custodial Investment Account

Opening a custodial account, such as a UGMA or UTMA, involves a straightforward process, typically through a brokerage firm. The initial step is to select a financial institution that offers custodial accounts, considering factors like fees, investment options, and platform user-friendliness.

To complete the application, specific information is required for both the custodian and the minor. The custodian will need to provide their legal name, Social Security number or tax identification number, date of birth, address, and employment details. For the minor, their name, Social Security number, and date of birth are necessary. Some institutions may also request identification documents for the custodian.

The application process can often be completed online, involving digital forms, disclosures, and terms and conditions. Once established, the account can be funded through various methods. These include linking a bank account for electronic transfers, setting up recurring contributions, or transferring existing assets like stocks or mutual funds.

Selecting Investments for a Minor’s Account

Once a custodial account is established, choosing appropriate investments involves understanding fundamental principles like compounding and diversification. Compounding allows earnings to generate further earnings over time, accelerating wealth growth, which is particularly beneficial given a minor’s long investment horizon. Diversification, or spreading investments across different assets, helps to manage risk by reducing the impact of poor performance from any single investment.

Common investment vehicles suitable for long-term growth in a minor’s account include stocks, exchange-traded funds (ETFs), mutual funds, and bonds. Stocks represent ownership in a company and offer potential for capital appreciation over time. ETFs are diversified baskets of assets that trade on exchanges like individual stocks, often with low expense ratios. Mutual funds are professionally managed portfolios that pool money from many investors to buy a variety of securities, providing diversification and expert oversight.

Bonds, which represent loans to governments or corporations, can add stability and income to a portfolio, though they typically offer lower growth potential compared to stocks. For a long-term investment strategy, a growth-oriented and diversified approach is often recommended. This typically involves a higher allocation to equities in the early years, gradually adjusting the risk profile as the minor approaches the age of majority or specific financial goals.

Tax Considerations for Minor’s Investments

Investments held for minors are subject to specific tax rules, primarily concerning unearned income. The “Kiddie Tax” provisions apply to unearned income, such as interest, dividends, and capital gains, received by certain children. For 2025, the first $1,350 of a minor’s unearned income is generally tax-free due to the standard deduction for dependents. The next $1,350 is taxed at the child’s own tax rate. Any unearned income exceeding $2,700 is taxed at the parents’ marginal tax rate. This rule aims to prevent parents from shifting income to their children to take advantage of lower tax brackets.

Contributions to custodial accounts are considered gifts and may have gift tax implications. For 2025, individuals can gift up to $19,000 per recipient annually without incurring gift tax or affecting their lifetime gift tax exclusion. Married couples can effectively double this amount to $38,000 per recipient. If a gift exceeds this annual exclusion, the excess amount counts against the donor’s lifetime gift and estate tax exemption, which is $13.99 million per individual for 2025.

Tax implications also vary upon withdrawal, depending on the account type. For UGMA/UTMA accounts, withdrawals are generally not taxed if they represent the original principal or if capital gains and dividends were already taxed under the Kiddie Tax rules. Custodial Roth IRAs allow for tax-free withdrawals of contributions at any time, and qualified withdrawals of earnings in retirement are also tax-free. Withdrawals from 529 plans are tax-free at the federal level if used for qualified education expenses. However, non-qualified withdrawals may be subject to income tax and an additional penalty on the earnings. Consulting a tax professional is advisable for personalized guidance.