If you are under age 18, you will need the supervision of a parent or guardian to start investing in stocks. However, you still have plenty of options for investing your money through a variety of custodial accounts. Investing with the help of an adult will teach you many lessons about your finances and set you up for a successful future. Plus, the sooner you invest, the more your money can grow.
The minimum age to invest in most states is 18. But there are still ways for children under 18 to invest in stocks and, therefore, their futures. Parents can help their children manage their investment accounts until they are old enough to do it themselves. Investing with kids can improve their financial literacy and give them a head start in wealth-building. Keep reading to learn about the various options for young investors and their parents.
How old do you have to be to buy stocks?
In the United States, 18 years is the age requirement for opening investment accounts. However, in some states, the minimum age is even older. For example, you must be 19 or older to be eligible to invest if you live in Alabama, Delaware, or Nebraska and 21 or older in Mississippi.
If you define a minor as any person under 18, as most states do, then at 18, you are considered a legal adult. At that point, you can enter into a legal contract on your own. This is why minors cannot engage with a stock brokerage to open investment accounts on their own. However, this doesn’t mean that minors cannot invest in stocks at all.
You can invest in stocks if you are under 18
Minors cannot invest in the stock market on their own, but they can do so under the supervision of a custodian. A custodian is a parent, guardian, or loved one over the age of 18 who manages the account for the minor.
Custodial brokerage account
A custodial brokerage account is one of the best ways to invest as a minor. It offers younger people the most possibilities for diversification, contribution, and education.
Types of custodial brokerage accounts
There are two types of custodial brokerage accounts. They are very similar, with small differences in availability and asset capacity.
- UGMA (Uniform Gift to Minors Act): A UGMA account can hold bonds, individual stocks, index funds, mutual funds, insurance policies, and cash. This type of custodial account was the original custodial account. It is available nationwide for parents to open for their children.
- UGTA (Uniform Transfers to Minors Act): A UTMA account can hold the same financial assets as a UGMA account with the addition of capacity for physical assets. Examples of physical assets are fine art and real estate. UGTA accounts are not available in all 50 states.
Why is opening a custodial brokerage account a good idea?
Custodial accounts allow for the most freedom in purchasing assets for a child, from mutual funds to individual stocks to fine art. Any adult can open this account for a child. Any adult can contribute to it with little to no contribution limits. Gifts given to the custodial brokerage account are irrevocable. No contributor can take their contribution back.
Regardless of who manages or contributes to the account, the account belongs to the minor. When the child turns 18, they take full control with complete account ownership. They can then do what they want with their funds and investments held in the account.
An adult can open an Individual Retirement Account (IRA) for a minor through a custodial IRA. Custodial IRAs allow families to start saving for a child’s retirement. The child must earn income to be eligible to open a custodial IRA. Babysitting, hostessing, or working at a snack bar counts as earned income. The adult will help the minor choose investments with their contributed taxable income.
Just like regular IRAs, custodial IRAs have contribution limits that can change over time. Currently, this limit is $6,000 per year. You can check the IRS’s website to get the most up-to-date IRA contribution limits.
Types of custodial IRAs
There are two types of custodial IRAs parents can choose to open and manage for their children. Both are similar to their respective noncustodial forms, with a few differences.
- Traditional IRA: Adults can contribute pretax dollars to a child’s traditional IRA. When they are ready to withdraw their retirement money, they will pay income tax. Whichever tax bracket they are in at the time of withdrawal will determine this income tax.
- Roth IRA: Custodial Roth IRAs require that your child earn income and pay taxes on it. If they are, you can help them put some of this post-tax money into their custodial Roth IRA. When they are ready to withdraw, they won’t have to pay any income taxes. If you want to open a custodial IRA for your child, a Roth IRA usually makes the most sense because your child’s tax rate will likely be very low. The parents’ tax rate does not affect the custodial Roth IRA.
Withdrawing from a custodial IRA
The child takes full account ownership when they turn 18 (or 19 or 21 in some states), and the funds are theirs to manage. At this point, the account will be transferred from a custodial IRA to a regular IRA.
Taxes and fees may apply if the child wants to withdraw money from their IRA early to pay for expenses like education or buying a home. Otherwise, they can start withdrawing investment earnings from the account without additional fees at the age of 59 1/2. By this time, their investments will have compounded significantly.
Advantages and disadvantages of opening a custodial IRA
When it comes to opening and contributing to retirement accounts, the earlier, the better. Starting an IRA for your child from a young age is a great way to get them a head start on their future and teach them the time value of money. There is no better time than now to start investing in retirement.
If you are contemplating whether or not to open a custodial IRA for your child, consider that your child might want the money earlier than retirement age. If so, a different investment account may be a better option.
A 529 plan is a state-sponsored savings account. Its sole purpose is to put money away for a child’s education. An adult still has to open a 529 account and then assign the child as the beneficiary.
Just like a brokerage account or IRA, the account holder can buy and sell assets within a 529 account. However, the options are limited compared to a standard brokerage account.
Types of 529 plans
There are two methods for parents to help their children save for education through a 529 plan.
- Prepaid college plan: Parents can set a price and then pay down the balance over time. For example, parents can make an educated estimate that their child will need $100,000 for college. They will then pay that price in advance via monthly contributions until it is paid in full.
- College savings plan: Parents can contribute to a college savings plan and invest the money in their child’s education. There is no limit or set value with this type of 529 plan.
Using 529 account money
Money in a 529 account grows tax-free. But there is a set of qualified uses for the money in a 529 account. As long as the money is spent on one of these qualified education expenses, there are no taxes or fees to withdraw.
It is possible to use the money from a 529 account for other purposes. However, you will have to pay taxes and a 10% penalty to use the money on any nonqualifying expense.
Parent or guardian brokerage account
The last option for a minor to start investing is to utilize a parent’s or guardian’s brokerage account. This is not a custodial account, and the child doesn’t have legal ownership of investment earnings once they reach 18. This also means that neither parent nor child benefits from any of the tax advantages mentioned previously. However, it is a great way to start educating your child on investing and to put money away for their future in an existing investment account.
How to invest in the stock market
There is so much to learn, and it can be fun! Start with taking some time to learn the basics of investing in the stock market.
If you are under the age of 18, you now know that you will need an adult to help you open a brokerage account. Investing comes with a learning curve, but these steps will help you get started.
Decide on an investment account
If you are 18 or older, you can open an investment account yourself. If you are a minor, a custodial account will get you in the investing door. First, choose what type of account you want to open. Then, decide on a brokerage — there are hundreds to choose from. Use SuperMoney’s Beginner’s Guide to Investing to compare brokerages and learn so much more.
Fund your account
Decide how much of your own money you want to contribute to your investment account. This can come from savings or any earned income. If you have consistent income, scheduling automatic transfers into your investment account is a good idea. You can even fund your account with a debit card.
Now you can finally buy stocks, bonds, mutual funds, index funds, and more. Make sure you do some research before jumping into purchasing financial assets. SuperMoney’s article on investing in index funds is a great place to start.
Manage your investments
There are many strategies to maximize your investment income. Making smart investment decisions is an art. As a beginner, start with the basics. Read up on five key principles of smart investing to learn about the importance of goals, risk tolerance, balance, cost, and discipline.
Why invest as a minor?
There are countless advantages to investing at a young age. The younger you start investing, the more time your money has to grow. Investments you make now positively impact your future and set you up for long-term wealth. If you are a parent considering investing in your child, start now. If you can put even small amounts into a custodial account for your child, they will thank you later.
Investing as a child teaches valuable lessons in financial literacy, ownership, and responsibility. A child with experience in investing and an understanding of the process has a head start on a successful future.
How can I invest if I’m under 18?
You can invest under age 18 using a custodial account. You will need an adult to open the account and help you manage it.
Can you use Robinhood at 17?
At 17, you can start investing with Robinhood through a custodial account, but not on your own. An adult has to act as your custodian when creating and managing your Robinhood account.
How old does my child have to be to buy stocks?
Your child has to be 18 (in some states 19 or 21) to buy stocks on their own. Custodial accounts are available if they want to start investing sooner than that.
Who pays taxes on a custodial account?
The child for whom the account is made will pay taxes on a custodial account.
How old do you have to be to invest in crypto?
Cryptocurrency is considered a security. You are required to be 18 or older to participate in securities exchanges in the United States. Therefore, you must be 18 to invest in crypto. A parent can buy crypto for a child and manage it for them until they reach 18 years old.
- In most states in the US, you must be 18 or older to invest in stocks. If you are under the age of 18, there are still ways to invest with the help of a parent or guardian.
- Investment accounts for minors include custodial brokerage accounts, custodial IRAs, 529 plans, and a parent’s or guardian’s brokerage account. Each has advantages and disadvantages. Assess your saving and investing objectives to decide which one is best for your family.
- Anyone can learn how to invest. You are never too young or too old. SuperMoney has many resources to help you learn about smart investing. Our Beginner’s Guide to Investing is a good place to start.
- Investing at a young age is one of the best financial decisions you can make for your future or the future of your child.
View Article Sources
- Five Key Principles to Smart Investing – SuperMoney
- SuperMoney Investment Guide – SuperMoney
- How to Invest in the Stock Market: 8 Basic Concepts – SuperMoney
- How to Buy Stocks with a Debit Card – SuperMoney
- How to Invest in Index Funds – SuperMoney
- 14 Cool Job Ideas for Kids of All Ages – SuperMoney
- How Old Do You Have To Be To Invest In Stocks? – Nasdaq
- IRA Contribution Limits – Internal Revenue Service
- Thinking About Buying the Latest New Cryptocurrency or Token? – Securities and Exchange Commission