Understanding The Legal Age For Investing

The minimum age to make an investment depends on the type of investment account. Generally, individuals must be 18 years old to open their own brokerage account, as this is the age when people can legally enter a contract on their own. However, minors can invest with the help of a parent or guardian through various types of custodial accounts. These include joint brokerage accounts, custodial brokerage accounts, and custodial retirement accounts. Each type of account has different features regarding ownership, investment choices, and tax advantages. It's important to understand the basics of investing, set clear investment goals, and be aware of the risks involved before starting.

Minors can open a custodial account, where an adult controls the investments on their behalf

Minors are not allowed to open their own brokerage accounts and invest independently. However, they can open a custodial account, where an adult, usually a parent or guardian, manages the account on their behalf. The adult custodian can be anyone from a parent or guardian to another trusted adult. The custodian has the legal responsibility and the final say over the investment decisions. The minor owns the cash and investments inside the account, but the custodian can only spend from the account on things that benefit the minor.

Custodial accounts are a great way to transfer assets to a child or teen. The money and control of the account are transferred to the teen when they reach the age of majority, which is typically 18 or 21, depending on the state.

There are two main types of custodial accounts: Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts. UGMA accounts can be used to hold only financial assets such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and insurance products. On the other hand, UTMA accounts can hold these financial assets as well as any property, such as real estate or cars. Both account types generally disallow higher-risk investment choices such as options, futures, and trading on margin.

Custodial accounts offer some tax advantages. A certain amount of unearned income is shielded from taxation each year, while another portion remains subject to taxes only at the child's tax rate, known as the "kiddie tax". Any income above these limits is taxed at the parent's tax rate.

In addition to custodial accounts, minors can also open joint brokerage accounts with an adult. In this case, the minor and adult co-own the account and jointly make investment decisions.

Joint brokerage accounts are owned by two or more people, allowing minors to co-own investments with an adult

In most cases, individuals need to be 18 years old to open a brokerage account. However, joint brokerage accounts are owned by two or more people, allowing minors to co-own investments with an adult. This means that minors can begin their investing journey early and benefit from the power of compounding.

Custodial accounts are a specific type of joint brokerage account where an adult manages the investments on behalf of a minor. The adult is the custodian of the account and has the final say in investment decisions. The minor will automatically gain full control of the account once they reach the age of majority, which is usually 18 or 21, depending on the state.

There are two types of custodial accounts: those established under the Uniform Gift to Minors Act (UGMA) and those established under the Uniform Transfer to Minors Act (UTMA). The type of account opened will depend on the state of residence. These accounts allow parents to give money to minors to invest in stocks or other assets under the supervision of an adult.

When choosing a custodial account, it is important to consider factors such as stock trading fees, minimum balance requirements, and the ability to buy fractional shares. Some online brokers that offer custodial accounts include Charles Schwab, Fidelity, and Greenlightcard.

Joint brokerage accounts provide minors with the opportunity to learn about investing and build their wealth over time. It is a way to involve young people in financial decisions and teach them about the stock market and other investments.

Minors can open a custodial retirement account with earned income from a job

In general, the minimum age to make an investment is 18, as people under 18 cannot legally enter a contract. However, minors can open a custodial retirement account with earned income from a job. This is known as a Roth IRA for Kids or a custodial Roth IRA. A parent or guardian will need to open and manage the account on their behalf.

A Roth IRA for Kids is a great way to jumpstart a child's retirement savings. It provides all the benefits of a regular Roth IRA but is geared towards children under 18. The money in the account must be used for the benefit of the minor, and an adult maintains control of the account until the child reaches the age of majority (typically 18 or 21, depending on the state).

To be eligible for a Roth IRA, a child must have earned income, which can include formal employment income or self-employment income. Babysitting, mowing lawns, and dog-walking are all examples of activities that can qualify a minor for Roth IRA contributions. The maximum contribution to a Roth IRA is $7,000 in 2024 and 2025, or the total of a child's earned income for the year, whichever is less. For example, if a child earns $2,000 from a summer job, a parent or guardian can contribute up to $2,000 to their Roth IRA.

One of the biggest advantages of a Roth IRA for Kids is the tax benefits. Since contributions are made with after-tax dollars, the account beneficiary won't pay tax when withdrawing during retirement. This is especially beneficial for those who expect to be in a higher tax bracket during retirement than in their working years. Additionally, contributions can be withdrawn at any time and used for any purpose, although there may be penalties for withdrawing earnings before the age of 59 1/2.

Another advantage of a Roth IRA for Kids is the long-term growth potential. The longer the money is invested, the more it can grow. For example, a single $7,000 investment today could be worth more than $300,000 in 50 years, assuming an 8% annual return.

Overall, a Roth IRA for Kids can be a powerful tool to help minors build a secure financial future. It provides tax advantages, flexibility, and the potential for significant long-term growth.

Minors can open a standard brokerage account with the help of a parent or guardian

Minors cannot open a standard brokerage account on their own. The minimum age to open an individual brokerage account is 18 years. However, minors can open a standard brokerage account with the help of a parent or guardian.

A standard brokerage account is an individual brokerage account that allows the owner to buy and sell stocks and funds. A joint brokerage account, on the other hand, allows two or more people to share ownership of the account and its assets.

A parent or guardian can open a joint brokerage account with a minor, which means the minor and the adult will co-own the account and its assets. The adult will also be allowed to make decisions on behalf of the account. The adult will be responsible for paying capital gains taxes, which vary depending on factors such as their federal tax bracket and how long they have held the investment.

Joint brokerage accounts are the most flexible type of investment account, typically providing the widest array of investing options. Many brokers offer joint brokerage accounts, and some investing apps for kids also allow users to open a joint account.

When opening a joint brokerage account, the adult will need to provide their name, address, birth date, and Social Security number, and the minor will need to provide their name, address, birth date, and Social Security number. The adult will also need to link another bank or brokerage account to fund the joint brokerage account.

It is important to note that the minimum age to invest in stocks and other investments completely on one's own is 18 years old. However, minors are allowed to make investment decisions within a joint brokerage account shared with an adult.

Investment apps geared towards teens allow them to open joint accounts with an adult

In general, the minimum age to make an investment is 18 years old, as people under 18 cannot legally enter a contract. However, this does not mean that younger aspiring investors cannot benefit from starting early with the help of their parents or guardians.

There are several investment apps geared towards teens that allow them to open joint accounts with an adult. For example, the Greenlight app offers investment accounts for kids that come with a debit card and bank account. It requires linked accounts from the adults' banks or brokerages, and parents or guardians must approve trades made in the investment account. Similarly, the Acorns app offers a Family account where parents can add multiple children at no additional cost.

Fidelity offers a Youth Account for teens aged 13-17, which is a brokerage account that allows teens to make investment decisions but lets parents monitor its activity and transactions. Another option is the E*Trade Custodial Account, which allows parents to open up a custodial account for their children, offering the chance to build a personalized portfolio through thousands of stocks, bonds, ETFs, and mutual funds.

These investment apps for teens provide a great opportunity for young people to learn about investing and make informed financial decisions.

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