How to Start Investing in Stocks Under 18

Minors can invest in stocks, though not directly in their own name. Legal structures and specific account types facilitate stock investment for individuals under 18, allowing them to benefit from potential market growth. These options introduce young individuals to financial principles and compound growth early on, laying a foundation for future financial literacy.

Custodial Brokerage Accounts (UGMA and UTMA)

Custodial accounts, established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), are legal arrangements that allow assets to be held for a minor’s benefit. These acts provide a simplified way to transfer wealth to children without the complexities of formal trusts. Assets placed into these accounts are irrevocably owned by the minor, meaning they cannot be reclaimed by the adult who contributed them.

The primary distinction between UGMA and UTMA lies in the types of assets that can be held. UGMA accounts are generally limited to financial assets such as cash, securities, and mutual funds. UTMA accounts offer broader flexibility, permitting a wider range of assets including real estate, intellectual property, and other tangible and intangible properties. The choice between the two often depends on the nature of the assets intended for the minor.

In both UGMA and UTMA accounts, an adult, typically a parent or guardian, serves as the “custodian” and is responsible for managing the account. The minor is designated as the beneficiary. The custodian has a fiduciary duty to manage the assets prudently and in the minor’s best interest until the minor reaches the “age of majority,” which varies by state, commonly ranging from 18 to 21 years old, and in some cases up to 25. Once the minor reaches this age, control of the assets is transferred directly to them.

Income generated within UGMA and UTMA accounts is generally taxed to the minor. This often proves advantageous because minors typically have lower income and, consequently, lower tax rates than adults. However, investment income above certain thresholds is subject to the “kiddie tax” rules. For 2024, the first $1,300 of a child’s unearned income is tax-free, and the next $1,300 is taxed at the child’s rate. Any unearned income exceeding $2,600 for 2024 is taxed at the parents’ marginal tax rate.

This tax provision aims to prevent parents from shifting investment income to their children simply to take advantage of lower tax brackets. The kiddie tax applies to children under 18, or those 18 years old whose earned income is less than or equal to 50% of their support, and full-time students aged 19 to 23 who meet the same support criteria.

Opening a Custodial Brokerage Account

Opening a custodial brokerage account, whether UGMA or UTMA, involves gathering specific information and completing an application process. The process is designed to be straightforward, often completed online or through paper forms provided by a financial institution.

For the custodian, typically a parent or legal guardian, required information generally includes their full legal name, date of birth, Social Security number or Taxpayer Identification Number, current address, and contact information. A government-issued identification, such as a driver’s license or passport, is necessary for verification. Employment information may also be requested by some brokerage firms.

For the minor beneficiary, the application will require their full legal name, date of birth, Social Security number, and current address. In some cases, a birth certificate might be requested to confirm the minor’s identity and age.

The application process typically begins by selecting a financial institution that offers custodial brokerage accounts, such as a brokerage firm or bank. Many institutions allow for online applications, which guide the custodian through steps to input the required information electronically. Alternatively, paper application forms can be downloaded or requested, completed manually, and then submitted via mail or in person.

Once the application is submitted and approved, the next step involves funding the account. Custodians can deposit funds through various methods, including electronic transfers from a linked bank account (ACH transfers), wire transfers, or by mailing a physical check. Some institutions might also allow for the transfer of existing securities into the new custodial account. An initial minimum deposit, often ranging from $500 to $2,000, may be required by some firms to open the account.

After the account is funded, the custodian can begin placing investment trades on behalf of the minor. This involves selecting specific investments, such as stocks, exchange-traded funds (ETFs), or mutual funds, through the brokerage firm’s online platform or by contacting a representative. The custodian manages all investment decisions, including buying, selling, and rebalancing the portfolio, always acting in the best interest of the minor.

Custodial Roth IRAs for Minors

A Custodial Roth IRA presents another avenue for minors to invest, particularly beneficial for those with earned income. Unlike UGMA/UTMA accounts, Roth IRAs have a strict “earned income” requirement for contributions. This means the minor must have taxable income from wages, salaries, tips, or net earnings from self-employment, such as earnings from babysitting, dog walking, or a part-time job. Gifts or allowances do not qualify as earned income for Roth IRA contribution purposes.

The annual contribution limits for Roth IRAs apply to minors. For 2024 and 2025, the maximum total annual contribution is $7,000, or the minor’s total earned income for the year, whichever amount is less. For instance, if a minor earns $3,000 in a year, their contribution to a Roth IRA cannot exceed $3,000, even if the general limit is higher. This limit applies across all Roth IRAs the individual may hold.

These accounts are structured as custodial Roth IRAs because minors cannot directly own an IRA. An adult, usually a parent, acts as the custodian, managing the account until the minor reaches the age of majority, typically 18 or 21, depending on the state. At that point, the account transitions to a standard Roth IRA under the minor’s direct control.

A significant advantage of Roth IRAs lies in their tax treatment. Contributions are made with after-tax dollars, meaning the money grows tax-free, and qualified withdrawals in retirement are also tax-free. This tax-free growth and withdrawal potential can be powerful for young individuals, as their investments have many decades to compound. Contributions can be withdrawn tax-free and penalty-free at any time, providing a degree of liquidity that traditional retirement accounts lack. Earnings can be withdrawn tax-free and penalty-free for qualified purposes, such as a first-time home purchase (up to $10,000) after the account has been open for at least five years.

The process for opening a custodial Roth IRA is similar to opening a regular custodial brokerage account, requiring personal information for both the custodian and the minor, including Social Security numbers and dates of birth. Some financial institutions may specifically offer custodial Roth IRAs, and it is important to choose one that fits the minor’s needs. While proof of earned income is not typically required during the application, records of the minor’s earnings should be maintained to justify contributions if ever questioned by the Internal Revenue Service.