How to Start Buying Stocks for Your Kids

Investing for children provides a significant head start on their financial journey, leveraging time and compounding returns. This guide explores establishing and managing investment accounts for minors, from understanding available options to making informed selections and preparing for asset transfer.

Understanding Investment Account Options for Minors

When considering investments for a minor, two primary types of custodial accounts are available: Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts. These accounts permit an adult to manage assets on behalf of a minor until the child reaches the age of majority. UGMA accounts hold financial assets like cash, stocks, bonds, and mutual funds. UTMA accounts offer broader flexibility, allowing for real estate, intellectual property, and other tangible assets. Both UGMA and UTMA accounts involve an irrevocable gift, meaning once assets are contributed, they legally belong to the minor and cannot be reclaimed.

The adult opening the account acts as the custodian, responsible for managing investments until the minor reaches the age of majority, which typically ranges from 18 to 21, depending on state law. At this point, the minor gains full legal control over the assets. While there are no federal contribution limits for UGMA/UTMA accounts, contributions are subject to annual gift tax exclusion rules. For example, in 2025, individuals can gift up to $19,000 per recipient without incurring gift tax, and married couples can gift up to $38,000.

Another option for minors with earned income is a Custodial Individual Retirement Account (IRA), such as a Roth IRA. This account functions similarly to a standard Roth IRA, allowing contributions to grow tax-free and withdrawals to be tax-free in retirement, provided certain conditions are met. Contributions to a Custodial IRA are limited to the minor’s earned income for the year, up to the annual IRA contribution limit, which is $7,000 for 2025 for those under age 50. This option is beneficial for long-term retirement savings, as the child’s current tax rate is likely lower than their future retirement tax rate.

Preparing to Open a Custodial Account

Before initiating the account opening process, gather all necessary information and documentation for both the custodian and the minor. The custodian, typically a parent or legal guardian, will need to provide their full legal name, Social Security Number (SSN), date of birth, current address, and a valid government-issued identification, such as a driver’s license or passport. This personal data is essential for identity verification and regulatory compliance.

Specific details for the minor beneficiary are also required to establish the account. This includes the minor’s full legal name, Social Security Number (SSN), and date of birth. Having these documents readily accessible streamlines the application process and helps prevent delays.

Establishing the Account

After all necessary information is assembled, formally establish the custodial investment account. This process begins with selecting a brokerage firm that offers custodial accounts, considering factors like fees, available investment options, and educational resources. Many reputable financial institutions provide streamlined online application processes for these accounts.

The application generally requires inputting personal and financial information for both the custodian and the minor directly into the brokerage’s online platform. This often includes providing details about the source of funds for the initial deposit. Once the application is completed and approved, the account can be funded through various methods, such as electronic transfers (ACH), wire transfers, or by depositing a check.

Making Investment Selections

Once the custodial account is open and funded, the custodian can begin selecting investments for the minor’s portfolio. A common strategy for long-term investing is diversification, which involves spreading investments across various asset classes to manage risk and enhance potential returns. Diversified funds, such as Exchange Traded Funds (ETFs) or mutual funds, are often suitable choices as they provide exposure to a broad range of underlying securities. Individual stocks can also be included, particularly those of well-known companies.

Another effective strategy is dollar-cost averaging, which involves investing a fixed amount of money at regular intervals, regardless of market fluctuations. This disciplined approach helps reduce the average cost per share over time and minimizes the impact of market volatility. To place a trade through a brokerage platform, the custodian navigates to a trading section, selects the desired security by its ticker symbol, specifies the number of shares or dollar amount to invest, and chooses an order type (e.g., market order or limit order). Reviewing the order details before execution is crucial to ensure accuracy.

Account Management and Transfer

Managing a custodial account involves ongoing oversight and strategic decisions by the custodian. This includes making additional contributions, which can be done regularly through automated transfers or as one-time deposits. Regularly monitoring the account’s performance and rebalancing the portfolio periodically helps ensure it remains aligned with the minor’s long-term financial goals and risk tolerance. Custodians also have the authority to make withdrawals from the account, but these funds must be used solely for the benefit of the minor.

The custodian’s responsibilities conclude when the minor reaches the age of majority, at which point control of the assets must be transferred to the now-adult beneficiary. The specific age of majority varies by state, commonly ranging from 18 to 21, or sometimes up to 25. The transfer process typically involves completing a “Transfer/Registration Change Request” form and providing proof of the beneficiary’s age, such as a birth certificate or government-issued ID. The assets are then moved into an individual account established by the former minor, granting them full legal control and responsibility for the investments.