How to Invest in Stocks Under 18: Custodial Accounts and Roth IRAs

If you want to invest in stocks under 18, you’ll need an adult to open a custodial brokerage account in your name, because U.S. law doesn’t let minors enter brokerage contracts on their own. The adult, called a custodian, controls the trading, but the shares and cash belong to you from the moment they go in. If you have a job or other earned income, a custodial Roth IRA is a second option that lets your investments grow tax-free for decades.

What a Custodial Account Is

Every state has adopted a version of the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These laws let an adult open and manage an investment account for a named minor while the minor remains the legal owner of everything in it.¹

The difference between the two comes down to what the account can hold. UGMA accounts are limited to financial assets like stocks, bonds, mutual funds, and bank deposits. UTMA accounts cover all of that plus other property such as real estate, patents, and royalties. For buying stocks, either works. Most major brokerages offer custodial accounts with no account minimum and no commissions on stock and ETF trades.

One rule catches families off guard: money placed in a custodial account is an irrevocable gift. The adult cannot take it back for personal use. The custodian has a fiduciary duty to use the assets solely for the minor’s benefit, and raiding the account can expose them to a breach of fiduciary duty claim.¹

How to Open the Account

The adult handles the application. Federal anti-money-laundering rules under the USA PATRIOT Act require the brokerage to verify everyone connected to the account, so the form collects details on both the adult and the minor.²

For the adult custodian, the brokerage asks for:

Full legal name
Residential address (a P.O. Box alone won’t work)
Date of birth
Social Security number or taxpayer identification number
Employment status and whether the adult is affiliated with a broker-dealer or stock exchange

For the minor, the form needs full name, date of birth, and Social Security number. If the minor doesn’t have an SSN yet, apply for one before starting the application.

The industry-affiliation question matters. FINRA rules require people associated with brokerage firms to disclose outside accounts, so the brokerage needs to know whether the custodian or anyone in the household works in the business.³

Most brokerages complete the online application in about 15 minutes. Some will also ask for a scanned government-issued photo ID. The adult signs everything and receives all legal notices and trade confirmations until the minor reaches adulthood.

Funding the Account and Buying Stocks

Once the account is approved, the custodian links a bank account using its routing and account numbers. Some brokerages verify the link with two tiny micro-deposits that have to be confirmed; others verify instantly through online banking credentials.

After the link is confirmed, money moves in through the ACH network. Transfers can settle the same business day, though one to two business days is more typical.⁴ The cash isn’t available to invest until the transfer settles.

From there, the custodian places buy orders for stocks, ETFs, or mutual funds. Each trade settles the next business day under the current T+1 standard, so the shares are officially yours one business day after the order fills.⁵ The minor can’t place trades directly, but the account works best when the custodian talks through each decision so the account doubles as practice.

A Custodial Roth IRA if You Have a Job

If you earn money from a job, freelance work, or self-employment, you also qualify for a custodial Roth IRA. The contribution limit for 2026 is $7,500 or your total taxable compensation for the year, whichever is less.⁶ A teenager who earned $3,000 babysitting can contribute up to $3,000.

The cash doesn’t have to come from your own paycheck. A parent or grandparent can fund the contribution as long as the total doesn’t exceed what you actually earned. The IRS counts wages, salary, tips, and net self-employment income. Allowances, birthday money, and investment income don’t count.

Contributions go in after-tax, so you get no upfront deduction. In return, the investments grow tax-free, and qualified withdrawals in retirement are tax-free too. A 16-year-old starting a Roth could get 50 or more years of compounding with no tax drag. Contributions (not earnings) can also be pulled out at any time without penalty, which gives some flexibility if the money is needed earlier.

Documentation matters more for self-employment income than for a W-2 job. Keep records of the work performed, who paid for it, when, and how much. The IRS can challenge Roth contributions if there’s no evidence of actual earned income.

Taxes You’ll Owe Each Year

Investment income in a custodial account is taxed every year, even if the money never leaves the account. The IRS applies the “kiddie tax” to a child’s unearned income — dividends, interest, and capital gains. For 2026, the brackets work like this:⁷

First $1,350: covered by the child’s standard deduction, not taxed.
$1,351 to $2,700: taxed at the child’s own rate, usually 10%.
Above $2,700: taxed at the parent’s marginal rate.

The kiddie tax applies to children under 18, and also to full-time students under 24 who don’t provide more than half their own support. If unearned income passes $2,700, the child files a Form 1040 with Form 8615 attached.⁸

The brokerage sends a 1099-DIV for dividends and a 1099-B for sales, but you’re responsible for reporting all income whether a form arrives or not.

What Happens When You Turn 18 (or 21, or 25)

Custodial oversight ends at the termination age set by state law. That’s usually 18 or 21, but it can run as high as 25 in some states.¹ On that birthday, the custodian must transfer full control to you. Some brokerages freeze the account if the handoff doesn’t happen within a set window.

After the transfer you have complete, unrestricted control. You can sell everything, withdraw the cash, change strategy, or close the account. The custodian has no further say and no mechanism to attach conditions. Families who want more control over timing or how the money gets used should look at a formal trust instead, which requires an attorney to set up.

How a Custodial Account Affects College Financial Aid

Custodial accounts have one real downside worth knowing before you fund one heavily. On the FAFSA, assets in a UGMA or UTMA count as the student’s property, and student assets reduce financial aid eligibility by up to 20% of their value. Assets the parents own in their own name reduce eligibility by at most 5.64%. So $10,000 in a custodial account could cut aid by up to $2,000, while the same $10,000 in a parent-owned 529 plan might cut aid by only $564.

If need-based financial aid is likely to matter, a 529 education savings plan is often the better home for college money. A 529 also grows tax-free and allows tax-free withdrawals for qualified education expenses, and it counts as a parent asset. The trade-off is that 529 funds have to be used for education or face taxes and penalties on the earnings, while custodial money can be spent on anything once the minor takes control.

1
HelpWithMyBank.gov. What is a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) Account?
2
U.S. Department of the Treasury. Treasury and Federal Financial Regulators Issue Patriot Act Regulations on Customer Identification
3
FINRA. FINRA Rules – 3210 Accounts At Other Broker-Dealers and Financial Institutions
4
Nacha. The ABCs of ACH
5
FINRA. Understanding Settlement Cycles – What Does T+1 Mean for You?
6
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
7
Internal Revenue Service. Rev. Proc. 2025-32
8
Internal Revenue Service. Topic No. 553, Tax on a Childs Investment and Other Unearned Income (Kiddie Tax)