When it comes to investing and growing your money over time, sooner is always the better. While starting investing at a young age can be of great benefit to people who want to build their wealth over time, there is a minimum age for when you can begin investing independently. Do not let this discourage you. Fortunately, a person under the age of 18 can buy and sell stock using an account with his or her name attached to it with the name of a parent or guardian also on the account. These are called custodial accounts, and they allow children to have a functional account with a broker under the permission of a parent or guardian.
The age at which you are eligible to invest varies state by state, but 18 years old is usually the minimum age set by brokers for opening an account. This is correlated to the conditions of turning 18 and being able to legally enter contracts independently as an adult.
Before You Invest
Check the Age Requirement
Knowing when a child will be of the minimum age to open a broker account in his or her respective state is useful for understanding whether they need a custodial account, and when custodial privileges will roll over to the former child completely.
States with over-18-years minimum requirements:
- Alabama, Delaware, Nebraska: 19 years old
- Mississippi: 21 years
Children below age 18 can invest, albeit indirectly. This approach often requires working in tandem with their parents or guardians, otherwise called passive investing. This is done by having the parent or guardian buys stocks in the name of the minor.
Additionally, children are legally able to own stocks if willed or gifted to them. As far as trading such stocks goes, it is still deferred to an adult to handle the account on behalf of them. Upon turning the minimum mandatory age for their state, the custodian of their account can be removed and the former child can manage the account autonomously.
Getting Started as a Young Investor
Whether aging into stocks he or she was gifted or inherited, or a first-time investor, young investors should learn the fundamentals of investing early on to achieve success with it. The good news is that time is on their side as an investor. He or she has time on their side to make long-term investments.
How Parents Can Help
A parent or guardian who is well-versed in investing is a great asset to a child who is interested in investing from a young age. Further, being willing to help with paperwork and open the appropriate accounts early on is helpful.
Setting up a Custodial Account
With a brokerage account, you are granted the ability to buy and sell stocks to help you attain financial goals. For most, having a personal brokerage account is the ideal scenario, but for minors, this requires a custodian over the account. A custodial account creates a relationship between the parent or guardian and child, wherein the custodian must invest and spend money in the account in the best interests of the child.
This is an ideal option because it can expose your child to the world of investing and help them establish familiarity with saving and growing their money at a young age. The custodian has full authority to manage the assets and will primarily be the one working with the broker on the account.
There are two different types of custodial accounts available, and the type of account available usually varies based on the law in your state of residence.
UGMA stands for Uniform Gift to Minors Act and provides for a limited set of possible gifts. This includes cash, stocks, bonds, mutual funds, and insurance policies.
The distinction between a UGMA and UTMA, or Uniform Transfer to Minors Act allows for a custodial relationship with nearly any type of asset. One example of this might include a real estate transaction.
Advantages of Custodial Accounts
You can invest money on behalf of a child without having legal ownership over their assets. This is beneficial for tax purposes, given most children have little to no earned income, they are typically in much lower tax brackets and subsequently, lower tax liability if any.
Further, there is great flexibility with using the asset on the child’s behalf. Many other saving accounts for children come with more stringent requirements as to how the account money is spent and designated (e.g. a 529 educational savings account has to be spent on educational expenses).
Disadvantages of Custodial Accounts
Because children grow up, custodial accounts are not a forever thing. If a child goes on to college, their custodial account is considered an asset of theirs, potentially impacting the amount of financial aid they are entitled to.
Another prospective downside is young adults who may not have financial responsibility receiving access to the account may lead to unwise spending.
Investing can be a great way to garner wealth and learn long-term saving habits. This is especially beneficial for younger individuals, as they have a longer period to make investments and grow wealth. The sooner a person begins saving and investing, the better. Through experience and time, they can learn and apply the fundamentals in productive ways.
Custodial accounts are a great option for children and parents that want an early start to investing and growing wealth. While there may be state by state variations in the type of custodial account available, one thing is certain: saving and investing is always fair game with the help of a parent.
Just remember, once the child reaches the minimum age of their state of residence, they can officially take ownership of their custodial account and manage their expenses. This is an exciting opportunity for them to either cash in or keeps growing their asset, and ideally, with years of investing exposure leading up to that, they will continue to grow their investment long-term.