What Age Do You Have to Be to Invest in Stocks?

Understanding the legal parameters surrounding investment activities is important for anyone considering participating in financial markets. A key aspect of these regulations pertains to age, as legal frameworks exist to govern who can independently engage in financial transactions and assume associated responsibilities.

Minimum Age for Direct Investing

Individuals must reach a specific legal age to independently engage in contractual agreements, which includes opening a brokerage account and making investment decisions. This legal benchmark is commonly referred to as the “age of majority.” In most states, the age of majority is 18 years, allowing individuals to enter into legally binding contracts and manage their own financial affairs.

While 18 is the prevalent age, a few states, such as Alabama and Nebraska, designate the age of majority as 19, and Mississippi sets it at 21. This age requirement ensures that individuals possess the maturity and understanding necessary to comprehend the implications of financial contracts. Minors, legally defined as individuals below the age of majority, lack the full contractual capacity required for such agreements.

Brokerage firms and financial institutions prohibit individuals under this age from opening self-directed investment accounts. This restriction protects both the minor, who might not fully grasp the risks involved, and the financial institution, by preventing contracts that could later be voided due to a lack of legal capacity.

Investment Options for Minors

Despite age restrictions for direct investing, minors can participate in the stock market through custodial accounts. These accounts are designed to allow an adult, known as the custodian, to manage investments for the minor’s benefit. The minor legally owns the assets, but the custodian maintains control over investment decisions until the minor reaches a specified age.

Two common types of custodial accounts are the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) accounts. UGMA accounts allow for the gifting and management of financial assets like cash, stocks, and bonds. UTMA accounts offer broader flexibility, permitting a wider range of assets, including real estate, in addition to traditional securities.

When establishing a custodial account, the adult opens the account in the minor’s name, serving as the custodian. The custodian has a fiduciary duty to manage the assets prudently and solely for the minor’s benefit, adhering to the “prudent person” standard of care. All investment decisions must be made in the best interest of the minor, without personal gain. Once the minor reaches the age of majority, or a later age specified by the state (18, 21, or up to 25 for UTMA), the assets formally transfer to their full control.

Important Considerations for Custodial Accounts

Using custodial accounts for a minor’s investments involves several implications. Investment income generated within these accounts is taxable to the minor. If a minor’s unearned income, which includes dividends, interest, and capital gains, exceeds certain thresholds, it may be subject to 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 is taxed at the parents’ marginal income tax rates, which can be significantly higher than the child’s rate. Custodians must track this income and ensure proper tax reporting to the Internal Revenue Service.

Custodial account assets also impact eligibility for financial aid. Assets held in a UGMA or UTMA account are considered the student’s assets when applying for federal student aid. Student assets are assessed at a higher rate (20%) compared to parental assets (maximum 5.64%). This higher assessment rate can reduce the amount of need-based financial aid a student qualifies for, potentially requiring them to contribute a larger portion of their own funds towards educational expenses.

Gifts made to a custodial account are irrevocable, meaning once assets are transferred into the account, they legally belong to the minor and cannot be reclaimed by the donor or the custodian. The custodian maintains control over the assets until the minor reaches the designated age of transfer, but their management must always be for the minor’s benefit, and they cannot use the funds for their own purposes. This irrevocability ensures that the assets are preserved for the minor’s future, but it also means the donor relinquishes all rights to the funds after the transfer.