What Age Can You Start Investing in Stocks?

Legal Age for Direct Stock Investment

Investing in the stock market offers a pathway to long-term financial growth, especially when initiated early. Compounding, where investment earnings generate their own returns, allows even modest contributions to grow significantly over time. Understanding the avenues available for young individuals to begin investing is a valuable first step toward building future financial security. This article clarifies age requirements and common investment vehicles for younger investors.

In most of the United States, an individual must attain the age of 18 to open a brokerage account in their own name and directly engage in buying and selling stocks. This age, often referred to as the age of majority, grants individuals the legal capacity to enter into binding contracts. Investment accounts involve contractual agreements between the account holder and the brokerage firm. Consequently, individuals under 18 generally lack the legal authority to form such contracts independently.

While direct investment is restricted for minors, mechanisms exist that allow younger individuals to participate in the stock market. These pathways typically involve an adult acting on their behalf until they reach the age of majority.

Custodial Accounts for Minors

For individuals under the age of 18, custodial accounts provide a primary method for investing in stocks and other securities. The two main types of custodial accounts are Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. These accounts permit an adult, known as the custodian, to manage assets on behalf of a minor beneficiary. The custodian typically makes all investment decisions, including the selection of stocks, bonds, or mutual funds, and handles transactions within the account.

While the custodian manages the account, the assets held within a UGMA or UTMA account are legally and irrevocably owned by the minor. Upon reaching the age of majority, typically 18 or 21 depending on the state, control of the assets formally transfers to the beneficiary. These accounts can be established by depositing cash, securities, or other property for the custodian to invest.

Custodial accounts offer flexibility in the types of assets they can hold, including stocks, exchange-traded funds (ETFs), mutual funds, and bonds. They are straightforward to open at most brokerage firms, requiring the custodian’s and minor’s details. These accounts are funded through contributions from the custodian or other individuals, providing a structured way for young people to benefit from market growth before they can invest independently.

Tax-Advantaged Investment Opportunities for Young People

Beyond custodial accounts, tax-advantaged investment opportunities exist for young people. A Roth IRA for minors is one option, allowing contributions if the minor has earned income from employment. While typically associated with retirement savings, Roth IRA contributions grow tax-free, and qualified withdrawals in retirement are also tax-free. The annual contribution limit for a Roth IRA is adjusted periodically by the IRS, currently $7,000 for 2024, or the minor’s earned income, whichever is less. Early contributions benefit from decades of tax-free growth.

A 529 plan is another tax-advantaged option, primarily designed for education savings. While adults typically establish and contribute to these plans, the underlying investments are market-based, similar to other investment accounts. Funds within a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses, such as tuition, fees, and room and board. It allows for market exposure and helps families invest for a child’s future educational needs. These plans differ from custodial accounts in their tax treatment and designated purpose.

These tax-advantaged accounts offer advantages compared to traditional taxable brokerage or custodial accounts, particularly regarding the tax treatment of earnings and withdrawals. They allow young individuals to engage with investments for retirement or education.