Do You Have to Be 18 to Invest in Stocks?

Kids benefit from financial education at an early age. Even if they have a savings account, receive an allowance or hold down a part-time job, they typically don’t yet know how markets work.

A brokerage account can help teach your child about different levels of risk. You can divide up initial investments into low-risk, medium-risk and high-risk vehicles so they can see how things change over time.

An older child may ask you for an account so they can experience investing on their own. There are a few options that would give them this opportunity while you remain largely in charge of the account.

The two main options for introducing your child to the world of investing are a guardian account and a custodial account, each of which offers different levels of parental control.

Guardian Account

A parent can open a guardian account under their own name. The child’s name also goes on the account, but it is the parent who holds legal title to the assets in the account. The parent also pays the taxes on any gains.

Custodial Account

A custodial account is in the child’s name. It is the parent who decides on investments and controls deposits and withdrawals. But importantly, it is the child who is the legal owner of the assets. Once they reach the age of majority in their state — typically 18 or 21 — they have full control over the account.

There are two types of custodial accounts:

• Uniform Transfer to Minors Act (UTMA): You can contribute almost any type of asset, like artwork, real estate, stocks, mutual funds and cash.
• Uniform Gift to Minors Act (UGMA): You can contribute stocks, mutual funds, cash or insurance policies to a UGMA.

IRA

If your child has worked or earned income for at least one year, you can help them open an IRA. This offers significant tax advantages, just like an IRA for adults.

There are some questions to ask before you decide on the best investing account for your child. Here are the things to consider.

How it Affects Paying for College

• Financial aid eligibility. When your child attends college, the assets in a custodial account form part of their financial profile. Therefore, this may disqualify them from some kinds of financial aid. If the stocks are in a guardian account, however, it is the parent who has legal title to these assets — so the child may still be eligible for aid.
• Alternative education savings options. If you are on the fence about a custodial investment account, revisit your objective for having such a vehicle for your child. A custodial account is ideal if you can tolerate higher risk, envision keeping assets in the account for the long term, and want to work with your child on active trading. But if the goal is just to save for college, there are other ways you can achieve that goal. For example, look into a 529 plan that gives you tax benefits and ensures you set the money aside for education and nothing else.

Ways Your Child Can Use the Account

• Amount of child’s control. If you open a custodial account for your child, you are still responsible for investment decisions, even if the assets are owned by the child. Also remember your role dissolves as soon as the child reaches the age of majority, which is normally 18 or 21, depending on your state.
• Restrictions on trading options. Brokerage houses may restrict the type of activity that one undertakes with a UTMA or UGMA account. Understand the full range of investment and trading options before opening the account. Then you can make sure it complies with your — and your child’s — financial plan.

How Much it Costs to Have the Investment Account

• Earning income. The child is responsible for taxes on custodial account assets. If your child works at a job, it may make sense to open an IRA. When they do not, carefully consider whether you want to open a guardian account or a custodial account. If the account is in your name, the taxes go on your bill.
• Minimum deposit amounts. The brokerage house puts some terms and conditions on custodial accounts. Shop around to find the minimum deposit that works best for your family. If you want your child to engage in active trading, perhaps find a brokerage that allows a smaller minimum to get started. When you’re ready to make a bigger investment, you can review options from brokerages with higher minimums.
• Brokerage fees. In addition to deposit minimums, custodial accounts come with transaction fees. Look closely at these disclosures, especially if you are starting with a small amount. Otherwise, your child could get an early lesson in how fees can reduce the return on investment (ROI).

UTMA and UGMA accounts are one way to start your child on the path to solid financial literacy. Before you open an account, however, it’s a good idea to review the options.

Think about how the assets will affect taxes and who will pay those taxes. Consider whether an investment account is ideal as a savings vehicle or whether it could be compatible with another plan as part of a comprehensive strategy. No matter what you choose, you’ll get your child off on the right path — with a better understanding of the markets and how they affect what’s left in your pocket.