How to Invest Under 18: What You Need to Know

Investing early can provide substantial financial advantages, allowing assets to grow over an extended period. While individuals under the age of 18 generally cannot directly hold investment accounts due to legal restrictions, specific structures exist to facilitate their participation in the financial markets. These legal frameworks enable adults to manage investments on behalf of a minor, establishing a pathway for young people to benefit from long-term financial growth.

Legal Framework and Account Types for Minor Investing

Minors cannot enter into legally binding contracts, including those for investment accounts. An adult must act on their behalf to establish and oversee these activities, as financial institutions cannot directly engage with individuals under the age of majority.

The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are common legal structures for minor investment accounts. These acts allow for irrevocable asset transfers to a minor, managed by a designated custodian. The custodian, typically a parent or guardian, maintains legal control until the minor reaches the age of majority, usually 18 to 21 years old depending on the state.

Assets in UGMA or UTMA accounts become the minor’s property, and the custodian has a fiduciary duty to manage them prudently. UGMA accounts are generally limited to financial assets like cash, securities, and insurance policies. UTMA accounts offer broader flexibility, allowing for real estate, intellectual property, and other tangible and intangible assets.

When the minor reaches the age of majority, the custodian must transfer all account assets to the now-adult beneficiary. This transfer is usually straightforward, though procedures vary by institution. Trusts can also hold assets for minors, offering greater customization and control beyond the age of majority, but often involve higher costs.

Preparing to Open a Minor Investment Account

Before applying for a minor investment account, select a suitable financial institution. Consider factors like:
Available investment options
Customer service quality
Online platform tools
Fee structures

Researching firms ensures the chosen institution aligns with the custodian’s preferences and the minor’s long-term financial goals.

Once a financial institution is identified, gather all necessary personal and financial information for both the minor and the custodian. This includes the minor’s full legal name, date of birth, and Social Security Number. For the custodian, provide their full legal name, current residential address, Social Security Number, contact details, and employment information.

Specific documentation is required to verify identities and information. Custodians must provide a government-issued identification, such as a driver’s license or passport, and proof of address, like a utility bill or bank statement. The minor’s birth certificate may also be needed to confirm their age and legal name.

Financial institutions provide application forms, accessible from their websites or upon request. Complete all fields precisely using the gathered information. Accuracy helps avoid delays in the application process.

Decide on the initial funding amount and its source. Custodians should determine how much to deposit and how funds will be transferred, such as via electronic bank transfer, physical check, or other accepted methods. This decision streamlines the account opening process.

Funding and Managing Minor Investment Accounts

Once preparatory steps are complete and forms are filled, submit the application to the chosen financial institution. Many institutions offer online submission portals for digital submission of forms and documentation. Applications can also be submitted via mail or in person at a branch.

After application processing and account approval, initial funding can be transferred. Subsequent contributions can be made through various methods, including:
Electronic transfers from a linked bank account
Direct deposit of checks
Setting up recurring contributions

Recurring transfers foster consistent savings and investment habits.

As custodian, the adult is responsible for all investment decisions on behalf of the minor. This includes selecting investments, executing trades, and managing the portfolio strategy. The custodian acts in a fiduciary capacity, managing assets prudently and in the minor’s best interest.

A wide range of investment options are available, allowing custodians to diversify holdings. Common choices include:
Individual stocks, representing company ownership
Bonds, which are loans to a government or corporation
Mutual funds and exchange-traded funds (ETFs), offering diversification by pooling money to buy collections of assets, suitable for long-term growth.

Custodians are also responsible for ongoing monitoring of the investment portfolio. This includes regularly reviewing performance and making adjustments to align with the minor’s financial goals and risk tolerance. Periodic rebalancing, adjusting asset allocation back to target percentages, helps manage risk and optimize returns.

Tax Implications of Minor Investment Accounts

Investment income in minor accounts, such as interest, dividends, and capital gains, is subject to specific tax rules, primarily the “kiddie tax.” This tax applies to unearned income of children under 18, or full-time students under 24 who do not provide more than half their own support. For 2024, the first $1,300 of a minor’s unearned income is tax-free.

The next $1,300 of unearned income is taxed at the child’s rate. Income exceeding $2,600 is subject to the parent’s marginal income tax rate. This prevents parents from shifting income to children for lower tax brackets. Income from these accounts must be reported on the minor’s tax return, and if the kiddie tax applies, Form 8615 must be filed.

Capital gains and losses from investment sales are also subject to these tax rules. Long-term capital gains, from assets held over one year, are taxed at preferential rates. Short-term capital gains are taxed at ordinary income rates. Capital losses can offset capital gains and a limited amount of ordinary income.

The custodian is responsible for reporting all necessary tax information. Financial institutions provide various tax forms, such as:
Form 1099-B for proceeds from broker and barter exchange transactions
Form 1099-DIV for dividends and distributions
Form 1099-INT for interest income

These forms summarize account income for accurate tax filing.