How Old Do You Have to Be to Invest in Stocks?

Investing in the stock market can be a powerful way to build wealth, and starting early offers significant advantages due to compounding. Many wonder about the age requirements for participating, especially when considering investments for younger family members. Understanding the regulations and available avenues for minors to invest is important for initiating financial growth at an early age. This includes navigating legal frameworks that govern direct investment activities and exploring alternative structures for underage investors.

Minimum Age for Direct Investing

An individual must generally be at least 18 years old to open a brokerage account and invest independently. This age requirement stems from contract law, as minors typically lack the legal capacity to enter into binding agreements. Since opening an investment account involves forming a contract, a minor cannot directly establish one in their own name. While the age of majority is 18 in most states, a few states may set it at 19 or 21. This legal barrier protects minors from potentially unfavorable financial obligations or decisions they might not fully comprehend.

Pathways for Underage Investors

Since minors cannot directly open investment accounts, specific legal structures facilitate investing on their behalf. The most common are custodial accounts, established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts allow an adult to manage assets for a minor until the child reaches the age of majority, when control transfers to the minor. UGMA accounts typically hold financial assets like stocks and bonds. UTMA accounts offer broader flexibility, allowing for a wider range of assets including real estate and intellectual property.

Beyond custodial accounts, other options exist depending on the investment objective. A 529 college savings plan, primarily designed for educational expenses, involves an underlying investment portfolio where contributions grow over time. Additionally, a Roth IRA for kids is an option for minors who have earned income from employment or self-employment, such as babysitting or mowing lawns. Contributions to a Roth IRA for a minor are limited to their earned income for the year, up to the annual contribution limit, which is $7,000 for 2025. These accounts also operate under a custodial structure until the minor reaches adulthood.

Setting Up and Overseeing Minor’s Investments

Establishing a custodial account requires an adult to act as the custodian, often a parent or grandparent. This custodian is responsible for managing the assets in the minor’s best interest until the account transitions to the child’s control. The custodian has a fiduciary duty, meaning they are legally bound to make investment decisions and manage the funds solely for the minor’s benefit. Once assets are contributed to a custodial account, they become the irrevocable property of the minor and cannot be reclaimed by the custodian or donor.

The process of opening such an account typically involves selecting a brokerage firm that offers custodial accounts and providing necessary information for both the custodian and the minor, including Social Security numbers. The custodian makes all investment decisions, including choosing stocks, bonds, and mutual funds. When the minor reaches the age of majority, which varies by state and can be 18, 21, or up to 25 in some UTMA states, the custodian must transfer full control of the assets to the now-adult beneficiary. The former minor then gains authority over the funds and can use them for any purpose.

Understanding Taxes on Minor’s Investments

Investments held in a minor’s name, particularly through custodial accounts, are subject to specific tax rules known as the “Kiddie Tax.” This tax applies to a minor’s unearned income, including dividends, interest, and capital gains from investments. Its purpose is to prevent parents from shifting investment income to their children to take advantage of lower tax rates. For the 2025 tax year, the first $1,350 of a child’s unearned income is generally tax-free.

The next $1,350 of unearned income is typically taxed at the child’s own tax rate. However, any unearned income exceeding $2,700 for 2025 is taxed at the parent’s marginal tax rate, which is often higher. This rule applies to children under 18, and in some cases, to full-time students aged 19 to 23 who do not provide more than half of their own support. Parents may also report their child’s interest and dividend income on their own tax return if certain conditions are met, such as the child’s gross income being below $13,500 in 2025.