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Stock investing is an established way of building wealth, but it’s a risky game at any age. Still, an increasing number of young people want to get in on the action. Many wonder, “do you have to be 18 to invest in stocks?”
The answer is yes — and no. Children can start investing when they’re underage, but they’ll need the help of a parent or guardian.
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.
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.
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:
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.
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.