How to Start Investing in Stocks Under 18

Investing in the stock market can build wealth, but direct investment accounts are generally not accessible to individuals under 18. Minors are typically not permitted to enter legal contracts, including those required for brokerage accounts. A custodial account offers a legally recognized solution, allowing an adult to manage assets on behalf of a minor until they reach legal adulthood. This article explains these accounts, their establishment, contributions, and tax implications.

Custodial Accounts for Minors

Custodial accounts, established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), serve as the legal vehicle for minors to hold investments. These accounts allow an adult to transfer financial assets to a minor without the complexity and expense of a formal trust. Assets are managed for the minor’s benefit until they reach the age of majority, when full control transfers to the beneficiary.

Within a custodial account, distinct roles are defined. The “custodian” is the adult, such as a parent or grandparent, tasked with managing the account and making investment decisions for the minor. The “minor” is the beneficiary, holding legal ownership of the assets from the moment they are transferred. The custodian acts in a fiduciary capacity, legally obligated to manage assets responsibly and solely in the minor’s best interest.

UGMA and UTMA accounts differ in the types of assets they can hold. UGMA accounts are generally limited to financial products like cash, stocks, bonds, mutual funds, and insurance policies. UTMA accounts offer broader flexibility, allowing for a wider range of assets including real estate, intellectual property, artwork, and other tangible or intangible property, alongside financial assets. Most states have adopted UTMA, in addition to UGMA.

The age at which a minor gains full control of a custodial account, known as the age of majority, varies by state and account type. For UGMA accounts, this is commonly 18, but can be 21 in some states. For UTMA accounts, the age of majority is typically 21, with some states allowing custodianship to extend up to age 25. State laws governing the Uniform Acts determine these age variations.

Establishing and Contributing to Custodial Accounts

Opening a custodial account is a straightforward process, typically initiated with a financial institution like a brokerage firm, bank, or mutual fund company. The first step involves gathering personal information and documentation for both the custodian and the minor beneficiary. This includes full legal names, Social Security Numbers, dates of birth, and current residential addresses for both parties.

Application forms can be accessed and completed through the financial institution’s online portal or by requesting physical forms. Many brokerage firms offer online platforms to simplify the account opening process. For online applications, fields must be populated with the gathered data, while physical forms may require signatures and, in some cases, notarization before submission.

After application approval, the next step is funding the custodial account. Financial institutions offer various methods for contributions. Electronic transfers, such as Automated Clearing House (ACH) transfers, are a common way to move funds from an external bank account. Checks can also be mailed, and some institutions support direct deposit. Existing investments, like stocks or mutual funds, can also be transferred into the new custodial account.

There are generally no annual contribution limits for custodial accounts. However, contributions are considered gifts to the minor and are subject to federal gift tax exclusion rules. For 2024, individuals can contribute up to $18,000 per beneficiary without incurring gift tax implications. This amount increases to $19,000 for 2025. For married couples, these amounts double, allowing for larger tax-free gifts.

Taxation and Asset Control in Custodial Accounts

Income generated within a custodial account, such as interest, dividends, and capital gains, is considered the minor’s income and is subject to taxation. This income is reported under the minor’s Social Security Number. However, these accounts are subject to specific Internal Revenue Service (IRS) rules known as the “kiddie tax,” which taxes unearned income.

Under the kiddie tax rules for 2024, the first $1,300 of a child’s unearned income is tax-free. The next $1,300 is taxed at the child’s marginal tax rate. Any unearned income exceeding $2,600 for 2024 is taxed at the parent’s marginal tax rate. For 2025, these thresholds adjust: the first $1,350 is tax-free, the next $1,350 is taxed at the child’s rate, and any amount above $2,700 is taxed at the parent’s rate.

The custodian is responsible for tax reporting. Financial institutions issue tax forms, such as Form 1099-DIV, Form 1099-INT, and Form 1099-B, under the minor’s Social Security Number. If the minor’s unearned income exceeds certain thresholds (e.g., $2,600 for 2024 or $2,700 for 2025), a separate federal income tax return for the child may need to be filed using IRS Form 8615. In some cases, if the child’s gross income is below a specified amount (e.g., less than $13,000 for 2024 or $13,500 for 2025), parents may elect to include the child’s interest and dividend income on their own tax return using IRS Form 8814.

The custodian holds broad powers in managing account assets, including making investment decisions, buying and selling securities, and managing cash. However, a key limitation is that funds must be used solely for the minor’s benefit. This includes expenses for education, healthcare, or other direct needs, but generally excludes expenses that are the parents’ legal support obligation. Once assets are placed into the account, they become the minor’s legal property and cannot be reclaimed by the donor or custodian.

Upon the minor reaching the age of majority, the custodianship terminates. The minor gains full control and ownership of all assets held within the account. The custodian is responsible for transferring the assets by re-registering them in the now-adult’s name. This transition means the former minor can use the funds for any purpose, as they have complete discretion over the assets.