These days, with the amount of information available about trading and investing online, investing in the stock market is often hailed as an easy way to make a lot of money.
Because of the hype surrounding the stock market, more and more young people are eager to get involved.
However, in the United States, there is a minimum age to buy stocks. If you’re wondering how old you have to be to start buying stocks, read on – we have all the information you need on this subject right here!
What Is The Minimum Age To Buy Stocks?
In the United States of America, you need to be 18 years old before you can open a brokerage account to buy and trade stocks.
This also applies to other forms of financial investment, such as ETFs (Exchange-Traded Funds) and Mutual Funds, and the minimum age is the same in all states.
But does this mean that nobody under the age of 18 in the U.S can start making money from the stock market? Not necessarily.
If you are not yet 18 years old, you may be able to have a special type of brokerage account opened in the name of a legal adult. This is called a custodial brokerage account.
All About Custodial Brokerage Accounts
Minors under the age of 18 can’t open brokerage accounts in the United States, it may be possible for an adult such as a parent or guardian to open a custodial brokerage account for a minor.
The account will need to be in the adult’s name until the minor turns 18, at which point, the name on the account can be changed.
Until the minor reaches legal age, any and all transactions made through a custodial brokerage account must be conducted by the adult named on the account.
With that being said, there are a few different types of custodial brokerage accounts to choose from. These include:
1. Standard Custodial Brokerage Account
The type of brokerage account most commonly opened for minors is simply referred to as a custodial brokerage account. This kind of account can either be a UTMA (Uniform Transfer to Minors Act) account or a UGMA (Uniform Gift to Minors) account.
These accounts are very beneficial because they come with child tax rates. The first $1,050 paid into this type of account is tax-free, and the next $1,050 is only taxable at child rates. After that, the account will be taxable at parent rates.
2. Traditional Custodial IRA
A traditional custodial IRA account is an account that a parent can open on behalf of their child. With this type of account, all income is contributed on a pre-tax basis, so the amount of income in the account that is taxable will be reduced.
3. Custodial Roth IRA
A custodial Roth IRA account is similar to a Roth IRA. This means that income is contributed on an after-tax basis.
The reason why many people choose this kind of custodial account is that it’s actually beneficial if the account holder is expecting their tax bracket to be higher.
Please bear in mind that both Custodial IRAs and Custodial Roth IRAs (see also ‘Can You Have Multiple Roth IRAs?‘) limit contributions by minors to 100% of their income or less during any tax year.
4. Education IRA
You might also hear an Education IRA called a Coverdell Education Savings Account.
Growth in this kind of custodial account is tax-free, and some withdrawals are also free from tax contributions as long as the money is being put toward education-related expenses.
5. 529 Plan
A 529 Plan account is a great choice of custodial brokerage account if the plan is for money to remain in the account for the foreseeable future. This is because, with a 529 Plan account, growth is tax-free as long as money is not withdrawn.
There is also no restriction on income with regard to tax contributions, making 529 Plan accounts even more appealing.
Buying Stocks For Under-18s: Factors To Consider
If you’re over the age of 18 or 21 (depending on your state of residence) and are considering opening a custodial brokerage account for a minor, you will have several important decisions to make about the type of account you choose to open.
Here are the factors you should bear in mind when weighing up your options:
Some custodial accounts have limits on the amount that can be contributed. While 529 Plan accounts and UGMA or UTMA accounts have no such limitations in place, custodial IRAs and Education IRAs do.
Depending on the type of account you choose, contributions might be limited to $2,000 per tax year, 100% of the minor’s income, or (if this is lower than 100% of the income), $6,000 per year.
You’ll also need to consider the potential for tax benefits when opening a custodial account for a minor.
For example, it is possible to open an account that allows for tax-deferred growth (529 Plan or ESA). These tax benefits can be used for specified educational expenses.
Other custodial accounts require certain tax contributions, however.
For example, IRA accounts will require either tax-deductible contributions, after-tax contributions, or taxable withdrawals, depending on the type of IRA account you choose to open.
UTMA and UGMA accounts are taxable at child’s rates until a certain level of income is reached.
If the intent in opening a custodial account is to save money (for example, before college), you may wish to consider a 529 Plan account or Education IRA.
Which allow tax-free contributions in certain circumstances (usually requiring that money not be withdrawn).
You need to be 18 year old to open a brokerage account yourself in the United States. However, legal adults can open custodial brokerage accounts for under-18s.
There are many types of custodial accounts to choose from, including UTMAs, UGMAs, IRAs, ESAs, and 529 Plan accounts.
So be sure to take factors such as tax rates, savings, and contribution limits into account before opening a custodial brokerage account.