What Age Do You Have to Be to Buy Stocks?

Investing in the stock market can be a powerful tool for building long-term wealth, yet many individuals wonder about the age requirements for participation. While the idea of young people gaining an early start in investing is appealing, specific legal frameworks govern who can directly own and trade stocks. Understanding these regulations is important for anyone considering investments, particularly for those who are not yet considered legal adults.

Legal Age for Direct Stock Ownership

To directly purchase and own stocks, an individual must generally have reached the age of majority. This legal threshold signifies when a person is considered an adult and can enter into legally binding contracts. In most parts of the United States, the age of majority is 18 years old. Some states, however, have set this age at 19 or even 21, meaning the precise requirement can vary depending on where an individual resides.

The underlying legal principle for this age requirement is contractual capacity. Buying or selling stocks involves entering into agreements with brokerage firms and other parties, which are considered legal contracts. Minors typically lack the full legal capacity to enter into such binding contracts, rendering any agreement they make generally voidable. This protects minors from potentially unfavorable financial obligations, but it also means brokerage firms cannot legally open accounts directly in a minor’s name.

The underlying legal principle for this age requirement is contractual capacity. Buying or selling stocks involves entering into agreements with brokerage firms and other parties, which are considered legal contracts. Minors typically lack the full legal capacity to enter into such binding contracts, rendering any agreement they make generally voidable. This legal protection is designed to shield minors from exploitation or from entering into unwise financial obligations. Consequently, brokerage firms cannot legally open accounts directly in a minor’s name and require individuals to be of legal age.

Investing for Minors Through Custodial Accounts

Since minors cannot directly enter into investment contracts, an alternative mechanism exists to allow them to own investments: custodial accounts. These accounts bridge the gap created by age limitations, enabling adults to manage assets for the benefit of a minor. A custodian, typically a parent or legal guardian, opens and oversees the account, making investment decisions on behalf of the young beneficiary.

The assets held within a custodial account are irrevocably owned by the minor, even though the custodian controls the account until the minor reaches the age of majority. This structure ensures that while the minor is the legal owner of the investments, an adult is responsible for managing them prudently. The custodian has a fiduciary duty to act in the best interest of the minor, making investment choices aimed at growing the assets for the minor’s future.

These accounts provide a structured way for families to begin investing early for children, fostering financial literacy and potentially significant wealth accumulation over time. The investments can include various securities, such as stocks, bonds, and mutual funds, purchased and managed by the custodian. Once the minor reaches the age of majority, control of the account and its assets officially transfers to them, allowing them to manage their investments independently.

The assets held within a custodial account are irrevocably owned by the minor, even though the custodian controls the account until the minor reaches the age of majority. This structure ensures that while the minor is the legal owner of the investments, an adult is responsible for managing them prudently. The custodian has a fiduciary duty to act in the best interest of the minor, implying careful management, accurate record-keeping, and avoiding any conflicts of interest. The custodian cannot use the assets for their own personal benefit.

Types of Custodial Accounts

Two primary types of custodial accounts facilitate investment for minors: the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) accounts. Both account types serve the purpose of holding assets for a minor until they reach the age of majority, with a designated adult, the custodian, managing the investments. The key distinction between them lies in the range of assets they can hold.

UGMA accounts are generally restricted to financial assets such as cash, stocks, bonds, and mutual funds. These accounts are widely available across all states. In contrast, UTMA accounts offer a broader scope for asset types, including not only financial instruments but also physical assets like real estate, intellectual property, artwork, and other tangible items. While most states have adopted UTMA, a few states, such as South Carolina and Vermont, have not, making UGMA the only option in those areas.

The custodian of either account type has a fiduciary duty to manage the assets prudently and solely for the minor’s benefit. This responsibility includes making investment decisions, maintaining records, and ensuring proper reporting. Contributions to these accounts are considered irrevocable gifts to the minor, meaning the assets cannot be reclaimed by the donor.

Upon the minor reaching a certain age, known as the age of termination or age of majority, the assets held in the custodial account are transferred directly to the minor’s control. This age varies by state and can range from 18 to 21 years old for UGMA accounts. For UTMA accounts, the age of termination can sometimes extend beyond 21, potentially up to 25, depending on state law and how the account was initially set up.

Two primary types of custodial accounts facilitate investment for minors: the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) accounts. Both account types serve the purpose of holding assets for a minor until they reach the age of majority, with a designated adult, the custodian, managing the investments. The key distinction between them lies in the range of assets they can hold.

The custodian of either account type has a fiduciary duty to manage the assets prudently and solely for the minor’s benefit. This responsibility includes making investment decisions, maintaining accurate records, and ensuring proper tax reporting. Contributions to these accounts are considered irrevocable gifts to the minor, meaning the assets cannot be reclaimed by the donor.

Upon the minor reaching a certain age, known as the age of termination or age of majority, the assets held in the custodial account are transferred directly to the minor’s control. This age varies by state and can range from 18 to 21 years old for UGMA accounts. For UTMA accounts, the age of termination can sometimes extend beyond 21, potentially up to 25, depending on state law and how the account was initially set up. Once the minor gains control, they have full discretion to use the funds for any purpose they choose.

Tax Considerations for Minor’s Investments

Investments held in a minor’s name through custodial accounts are subject to specific tax rules, primarily the “Kiddie Tax.” This tax aims to prevent high-income individuals from shifting investment income to children in lower tax brackets to reduce their overall tax liability. The Kiddie Tax applies to a minor’s unearned income, which includes investment income such as dividends, interest, and capital gains, exceeding a certain annual threshold.

For 2024, the first portion of a minor’s unearned income, typically around $1,350, is generally tax-free. The next portion, also around $1,350, is taxed at the child’s tax rate. However, any unearned income above this combined threshold is subject to the parent’s marginal income tax rate, which is often significantly higher than the child’s rate. This rule applies to children under age 18, and in some cases, to full-time students under age 24.

Tax reporting requirements for custodial accounts necessitate that the income generated is reported under the minor’s Social Security number. The custodian is responsible for ensuring these tax obligations are met. While contributions to UGMA/UTMA accounts are made with after-tax dollars and there are no contribution limits, large gifts may be subject to federal gift tax rules, aligning with annual gift tax exclusion limits. These tax implications highlight the importance of understanding how investment income in custodial accounts is treated, as it can impact the net returns on the minor’s investments.

Investments held in a minor’s name through custodial accounts are subject to specific tax rules, primarily the “Kiddie Tax.” This tax was established to prevent high-income individuals from shifting investment income to children in lower tax brackets to reduce their overall tax liability. The Kiddie Tax applies to a minor’s unearned income, which includes investment income such as dividends, interest, and capital gains, exceeding a certain annual threshold.

For 2024, the first $1,300 of a child’s unearned income is generally tax-free. The next $1,300 is taxed at the child’s tax rate. However, any unearned income above $2,600 is subject to the parent’s marginal income tax rate, which is often significantly higher than the child’s rate. This rule applies to children under age 18, and in some cases, to full-time students under age 24.

Tax reporting requirements for custodial accounts necessitate that the income generated is reported under the minor’s Social Security number. The custodian is responsible for ensuring these tax obligations are met, often using IRS Form 8615 to calculate the tax on unearned income above the threshold. Alternatively, if the child’s gross income is below a certain amount and consists only of interest and dividends, parents may elect to include the child’s income on their own tax return using IRS Form 8814. These tax implications highlight the importance of understanding how investment income in custodial accounts is treated, as it can impact the net returns on the minor’s investments.