Yes, a 16-year-old can invest in stocks, just not through an account opened in their own name. Because minors generally can’t be held to contracts, brokerages won’t let anyone under 18 sign up alone. The standard path is a custodial brokerage account: an adult opens it, names the teen as the owner, and manages the trades until the teen reaches the age set by state law. The account is simple to open, carries real tax rules, and transfers to the teen sooner than many parents expect.
Why the Account Has to Be Custodial
A brokerage account is a contract. Terms of service, margin disclosures, and trade authorizations all require a legally binding signature, and minors can usually disaffirm contracts they sign. That makes a solo account a non-starter for the broker. A custodial account solves it: the adult custodian is the one bound by the agreement, while the assets legally belong to the minor from day one.
How Custodial Accounts Work
Custodial accounts are opened under the Uniform Transfers to Minors Act (UTMA) or the older Uniform Gifts to Minors Act (UGMA). Nearly every state has adopted one or both. UTMA is more common now because it allows a wider range of assets, including real estate and fine art, not just securities and cash.1Cornell Law School. Uniform Transfers to Minors Act
Every dollar that goes into the account is an irrevocable gift to the minor. The custodian cannot pull money back out for personal use and has a fiduciary duty to spend and invest it for the minor’s benefit. Withdrawals are fine when they directly serve the child, such as education costs, a car, or activities. Reimbursing yourself for your own expenses out of the account is a misuse of the funds.
Anyone can contribute. For 2026, each giver can transfer up to $19,000 per child per year without filing a gift tax return, and married couples can combine their exclusions for up to $38,000 per child.2Internal Revenue Service. Gifts and Inheritances 1
How to Open One
Most major online brokers offer UTMA or UGMA accounts, and the application usually takes about 15 minutes. Federal customer identification rules require the custodian to provide a full legal name, date of birth, residential address, Social Security number, and a government-issued photo ID.3eCFR. 31 CFR 1020.220 – Customer Identification Program Requirements for Banks The teen’s full legal name and Social Security number go on the application as well.
The custodian signs the agreement and accepts fiduciary responsibility. Identity verification runs against public records and credit bureau data in the background. Funding is usually an ACH transfer from the custodian’s bank, though some firms accept paper checks. Minimums vary; some brokers start at $1, others at a few hundred dollars. Once the account is open, the custodian can buy stocks, ETFs, and mutual funds right away.
Name a Successor Custodian
During setup, designate a backup custodian. If the primary custodian dies or becomes incapacitated and no successor is named, the minor’s legal guardian typically steps in, but confirming authority can require a court petition. This matters most when a grandparent or older relative is the custodian.
When the Teen Gets Full Control
Custodial accounts have a built-in expiration. When the minor reaches the termination age set by their state, the custodian must hand over the assets. The common ages are 18 or 21, and a handful of states allow custodianships to run as late as 25.1Cornell Law School. Uniform Transfers to Minors Act There is no financial-literacy test. The money is legally the teen’s, and the transfer is automatic.
This part surprises some families. An account funded steadily since childhood can hold a substantial balance by 18, and the new adult can liquidate it, spend it, or keep investing. There is no mechanism to delay the handover or attach conditions. If that worries you, a trust gives more control over timing and distributions, though trusts cost more to set up and run.
The mechanics at the brokerage are straightforward. When the beneficiary hits the termination age, the firm restricts the account until the now-adult beneficiary contacts them. From there, the account converts to a standard individual brokerage account, transfers to another firm, or closes out for a check.
Taxes on the Earnings
Investment income in a custodial account belongs to the minor for tax purposes. That sounds like a shelter, but the “kiddie tax” under Internal Revenue Code Section 1(g) caps the benefit by taxing a child’s unearned income above a threshold at the parent’s marginal rate.4Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
For 2026, the brackets work like this:5IRS.gov. Rev Proc 2025-32 Inflation-Adjusted Items for 2026
- The first $1,350 of unearned income is tax-free, covered by the minor’s standard deduction.
- The next $1,350, up to $2,700, is taxed at the child’s own rate.
- Anything above $2,700 is taxed at the parent’s marginal rate, which can run as high as 37%.
The kiddie tax applies to children under 19, or under 24 if they’re full-time students who don’t provide more than half their own support. When unearned income tops $2,700, the child files a return with Form 8615 to figure the tax at the parent’s rate.6Internal Revenue Service. 2025 Instructions for Form 8615 If the child’s only income is interest, dividends, and capital gain distributions totaling less than $13,500, the parent can elect to report it on their own return with Form 8814 instead.7Internal Revenue Service. Instructions for Form 8814 (2025) The parent election is simpler but sometimes produces a slightly higher tax, so run both.
A Custodial Roth IRA If the Teen Works
If the 16-year-old has earned income, a custodial Roth IRA is worth opening alongside or instead of a taxable custodial account. Growth is tax-free and qualified retirement withdrawals are tax-free, which turns 16 into a long runway for compounding.
The teen must have earned income reported to the IRS. A W-2 job counts, and so does documented self-employment income; cash babysitting generally doesn’t unless it’s reported. The contribution is capped at the lesser of the teen’s earned income or the annual IRA limit, which is $7,500 for 2026.8Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 A teen who earns $3,000 over the summer can contribute up to $3,000, no more.
A parent or grandparent can supply the cash as long as the teen’s earned income supports it. The money doesn’t have to come from the teen’s paycheck.
Impact on College Financial Aid
Custodial accounts can quietly cost a family thousands in need-based aid. On the FAFSA, UTMA and UGMA assets count as the student’s, assessed at up to 20% per year, versus a maximum of about 5.64% for parent-held assets. A $50,000 custodial account can shrink aid by up to $10,000 a year; the same $50,000 in a parent’s name reduces aid by at most about $2,820.
Private colleges using the CSS Profile may treat custodial accounts similarly, with each school applying its own formula. The direction is the same, and the money can’t be moved back out of the custodial account because the gift is irrevocable. Families expecting to apply for need-based aid sometimes spend custodial funds down on legitimate items for the student, like a car, laptop, or tuition, before filing the FAFSA. A custodial Roth IRA is friendlier here, since retirement accounts are generally excluded from the FAFSA asset calculation.
What the Teen Can Actually Do
The custodian places the trades, but the point is to get the teen involved. Nothing stops a 16-year-old from researching companies, reading earnings reports, and telling the custodian what to buy; the custodian just has to be the one who submits the order. Some brokers also offer teen-facing apps where the minor can watch the portfolio, track performance, and send trade requests for the custodian to approve. For a teen who wants to learn by doing, that’s a real head start over waiting until 18 to begin from zero.