How to Start Investing Under 18

Investing for individuals under the age of 18 presents a unique financial landscape due to legal restrictions on minors entering into contracts. While a minor cannot independently open a brokerage account or engage in direct investment activities, established legal structures allow adults to manage investments on their behalf. These structures provide pathways for wealth accumulation and financial education before adulthood. The primary methods for investing on behalf of a minor involve custodial accounts and specialized education savings plans, each with distinct features and implications.

Custodial Investment Accounts

Custodial investment accounts, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), serve as legal vehicles for adults to hold and manage assets for the benefit of a minor. These accounts are irrevocable; once assets are placed into them, they legally become the minor’s property. The adult who sets up and oversees the account is the custodian, responsible for managing assets until the minor reaches a specified age. The minor is the beneficial owner, for whom all investment decisions and withdrawals must be made.

UGMA and UTMA accounts differ in the types of assets they can hold. UGMA accounts are limited to financial assets like cash, stocks, bonds, and mutual funds. UTMA accounts offer broader flexibility, allowing for real estate, intellectual property, and other tangible property, in addition to financial instruments.

Establishing a Custodial Account

Opening a custodial account requires an adult to act as the custodian, such as a parent, grandparent, other relative, or legal guardian. These accounts are available at most major financial institutions, including brokerage firms, banks, and mutual fund companies. The choice of institution depends on investment options and fee structures.

To establish an account, specific information is required for both the custodian and the minor beneficiary, including full names, addresses, dates of birth, and Social Security Numbers. Financial institutions will also request valid government-issued identification for the custodian. For the minor, documentation like a birth certificate or Social Security card may be necessary to verify identity.

After gathering required information, complete the account application, specifying the account type (UGMA or UTMA). Initial contributions can be made through electronic transfers or checks. While there are no contribution limits for these accounts, contributions are subject to federal gift tax rules. For example, in 2025, individuals can contribute up to $19,000 per beneficiary without triggering gift tax reporting requirements, or $38,000 for married couples filing jointly.

Managing Investments within Custodial Accounts

Once established and funded, the custodian assumes responsibility for all investment decisions on behalf of the minor. The custodian has a fiduciary duty to act in the minor’s best interest, choosing investments for their future financial well-being.

Custodial accounts offer various investment options, similar to standard brokerage accounts, including common stocks, corporate and government bonds, mutual funds, and exchange-traded funds (ETFs). Trades can be executed through the financial institution’s online platform or by placing orders via phone. Dividends and interest income can be reinvested directly into the account, allowing for compounding growth.

Withdrawals from a custodial account are permitted only for expenses that directly benefit the minor. Acceptable uses include educational expenses, healthcare costs, and enrichment activities like music lessons or summer camps. Funds generally cannot be used for basic parental obligations such as food, shelter, or clothing.

The custodianship of the account automatically terminates when the minor reaches the age of majority, which varies by state (typically 18 to 21 years old, and in some states, up to 25). At this point, legal control of all assets transfers directly to the now-adult beneficiary, who gains full discretion over the funds.

Understanding 529 Plans

529 plans are tax-advantaged investment vehicles specifically designed for education savings. They help families save for qualified education expenses, including tuition, fees, room and board, and books at eligible educational institutions. These plans can also cover K-12 tuition expenses, with a federal limit of $10,000 per year.

Unlike custodial accounts, the individual who establishes a 529 plan, known as the account owner, retains control over the assets. The account owner designates a beneficiary, typically a child or grandchild, but can change the beneficiary if circumstances shift. This flexibility differs from custodial accounts, where assets irrevocably belong to the minor.

There are two main types of 529 plans: prepaid tuition plans and education savings plans. Prepaid tuition plans allow an account owner to lock in current tuition rates for future college attendance, while education savings plans invest contributions in a variety of portfolios, with earnings growing over time. 529 plans are state-sponsored programs; account owners can choose any state’s program. Contributions are made with after-tax dollars, and there are no federal income limits for contributing.

Tax Considerations for Minor’s Investments

Tax implications for investments held on behalf of a minor vary significantly between custodial accounts and 529 plans. For custodial accounts, investment income (interest, dividends, and capital gains) is generally taxable to the minor, who is the legal owner of the assets.

The “kiddie tax” applies to a minor’s unearned income that exceeds certain thresholds. For 2025, the first $1,350 of unearned income is tax-free. The next $1,350 is taxed at the child’s rate, and amounts above $2,700 are taxed at the parent’s rate. This income may need to be reported on the minor’s tax return, or parents may elect to include it on their own return using IRS Form 8814.

In contrast, 529 plans offer substantial tax advantages. Earnings grow on a tax-deferred basis, meaning no taxes are paid on the investment growth until withdrawals are made. Qualified withdrawals for eligible education expenses are generally tax-free at the federal level and often at the state level. This includes expenses for college, vocational schools, and up to $10,000 annually for K-12 tuition. However, non-qualified withdrawals, not used for eligible education expenses, are subject to income tax on the earnings portion and may also incur a 10% federal penalty on those earnings.