Because a minor can’t legally open a brokerage account, the way to buy stocks for kids is to open an adult-controlled account that holds the investments on the child’s behalf. The main options are a custodial brokerage account under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act, a 529 education savings plan, a Coverdell Education Savings Account, or, if the child has a job, a custodial Roth IRA. Each has different rules on taxes, control, and what the money can eventually pay for.
Why a Child Can’t Just Open a Brokerage Account
In most states, anyone under 18 doesn’t have full legal capacity to enter into contracts. Buying and selling securities is a contractual transaction, so a child can’t open a brokerage account or place trades on their own. An adult has to be the account holder of record and make the investment decisions until the child reaches the age of majority. The child is still the beneficial owner of the money. They just can’t be the one signing for it.
Custodial Brokerage Accounts Under UGMA and UTMA
The most common way to buy stocks for a child is a custodial account set up under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act. UGMA accounts hold financial assets like cash, stocks, bonds, and insurance policies. UTMA accounts can also hold real estate and other tangible property.1Cornell Law School. Uniform Gifts to Minors Act (UGMA) For a family that just wants to buy shares for a kid, the two work the same way in practice.
You open the account as custodian, with the child named as the beneficial owner. You pick the investments, place the trades, and manage the portfolio. Any money you put in is an irrevocable gift. You can’t take it back, and you can’t use it for expenses that are a parent’s legal obligation, like food and housing.1Cornell Law School. Uniform Gifts to Minors Act (UGMA) The account exists only for the child’s benefit.
Most major online brokerages now allow fractional share purchases in custodial accounts, so you can start with as little as $5. That makes regular contributions possible without saving up for a full share of a pricier stock.
Gift Tax Limits
Deposits into a custodial account count as gifts under federal tax rules. In 2026, you can give any one person up to $19,000 per year without triggering gift tax reporting.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A married couple can each give $19,000 to the same child, for a combined $38,000 a year. Most parents will stay well under this. Grandparents making a large one-time gift are the ones who need to watch it.
The Kiddie Tax on Investment Gains
Here’s where custodial accounts catch people off guard. The money legally belongs to the child, so any dividends, interest, or capital gains are the child’s income for tax purposes. That’s fine for small amounts, since the child’s rate is low. But once the child’s unearned income clears $2,700 in 2026, the excess gets taxed at the parent’s marginal rate.3Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income This is called the kiddie tax.
The breakdown works like this. The first $1,350 of a child’s unearned income is covered by their standard deduction and is tax-free. The next $1,350 is taxed at the child’s own rate. Anything above $2,700 is taxed as if it were the parent’s income. The rule applies to children under 18, and also to 18-year-olds and full-time students up to age 23 whose earned income doesn’t cover more than half their support.4Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
On a small portfolio generating modest dividends, this hardly registers. On a larger custodial account held by a high-bracket household, it can take a real bite. The kiddie tax is one of the main reasons families with bigger budgets lean toward 529 plans or custodial Roth IRAs instead.
What Happens When Your Child Turns 18 or 21
The custodian’s authority ends when the child hits the age of majority, which varies by state. The default is 18 or 21 in most places, and some states let you set the transfer age as high as 25 at the time the account is opened. Once that date arrives, the money belongs to the child outright, with no strings on how they use it.
That’s the biggest risk of a custodial account. A sensible 12-year-old can turn into a reckless 21-year-old, and there’s no legal mechanism to keep the money in the account. If controlling how the funds get spent matters to you, a 529 plan or a trust is a better structure.
How Custodial Accounts Affect Financial Aid
Since the assets belong to the child, the FAFSA formula counts 20% of a custodial account’s value in the Student Aid Index.5Federal Student Aid. Student Aid Index (SAI) and Pell Grant Eligibility A parent-owned 529 plan, by contrast, is assessed at a rate generally capped around 5.64%. A $50,000 custodial account can reduce aid eligibility by roughly $10,000 over four years; the same amount in a parent-owned 529 cuts it by about $2,800.
Families planning on need-based aid sometimes shift contributions toward a 529 in the years before college for exactly this reason.
529 Plans for Education
A 529 plan is a state-sponsored investment account built for education costs. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified expenses like tuition, fees, books, supplies, and room and board for students enrolled at least half-time. The account owner, usually a parent or grandparent, keeps control. You can change the beneficiary to another family member at any time without tax consequences.6Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
The cost of that structure is flexibility. Pull money out for anything other than qualified education expenses and the earnings portion is hit with income tax plus a 10% penalty. Over 30 states also offer a state income tax deduction or credit for 529 contributions, which can add another layer of benefit depending on where you live.
Rolling Unused 529 Money Into a Roth IRA
Since 2024, leftover money in a 529 can be rolled into a Roth IRA for the beneficiary. The 529 account must have been open at least 15 years, the funds being rolled must have been contributed more than five years ago, and the lifetime rollover cap is $35,000.6Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs Each year’s rollover can’t exceed the annual Roth IRA contribution limit, which is $7,500 for 2026, reduced by any other IRA contributions the beneficiary made that year.7Internal Revenue Service. Retirement Topics – IRA Contribution Limits The 15-year clock is a good reason to open the account early even if the first deposit is small.
Coverdell Education Savings Accounts
A Coverdell ESA works like a 529 plan but with a tight ceiling: total contributions across all Coverdell accounts for one beneficiary can’t exceed $2,000 per year.8Internal Revenue Service. Topic No. 310, Coverdell Education Savings Accounts Qualified distributions are tax-free, and Coverdell funds can pay for K-12 expenses in addition to college. Non-education withdrawals of earnings are taxed as income with a 10% additional tax.9Office of the Law Revision Counsel. 26 USC 530 – Coverdell Education Savings Accounts The low annual cap means most families use a Coverdell as a supplement rather than the main vehicle.
Custodial Roth IRA for a Working Teen
If your child has earned income from a job, including informal work like babysitting or lawn mowing, you can open a custodial Roth IRA. The annual contribution is capped at the lesser of $7,500 or the child’s total taxable compensation for the year.7Internal Revenue Service. Retirement Topics – IRA Contribution Limits The money doesn’t have to come from the child. A parent can fund the full contribution as long as the amount doesn’t exceed what the child actually earned.
The tax picture is hard to beat. Roth contributions grow tax-free, and qualified retirement withdrawals are also tax-free. A teenager who puts in $3,000 a summer for a few years and leaves it alone can have six figures by retirement. The kiddie tax doesn’t apply to gains inside a Roth IRA, since nothing is being distributed as current income.
The limitation is the earned income rule. A young child with birthday money and no job can’t contribute, no matter how willing a parent is to fund the account.
Opening and Funding the Account
You’ll need identifying information for yourself and the child: full legal names, dates of birth, and Social Security numbers. The SSN is required because the earnings get reported under the child’s taxpayer ID.10eCFR. 31 CFR 363.27 – Accounts for Minors Most major online brokerages offer custodial accounts with no minimum balance and commission-free stock trades.
On the application, you’re listed as custodian and the child as beneficiary. Once both identities are verified, you link a bank account and transfer in cash. From there, placing a trade is the same as in any brokerage account: pick the stock, enter a share count or a dollar amount for fractional shares, and submit the order. Many families set up recurring contributions so the account grows automatically.
Picking the Right Account
The choice usually comes down to what the money is meant to do and how much control you want to keep.
- A custodial brokerage account under UGMA or UTMA works for general-purpose investing with no restrictions on how the child eventually uses the money. The trade-offs are the kiddie tax on gains, the child taking full control at the age of majority, and the high FAFSA assessment rate.
- A 529 plan fits families committed to funding education. Growth is tax-free, the FAFSA hit is small, and the parent keeps control. Unused money can roll into a Roth IRA under the conditions above. Non-education withdrawals pay a 10% penalty on earnings.
- A custodial Roth IRA is unmatched for a teenager with earned income, but contributions can’t exceed what the child actually earned, and it isn’t an option for younger children without jobs.
- A Coverdell ESA is useful as a supplement, particularly for K-12 costs, but the $2,000 annual cap keeps it from doing much heavy lifting on its own.
Plenty of families combine them. A 529 handles education, a custodial brokerage holds stocks meant as a general head start, and a Roth IRA opens the day a teenager earns a first paycheck. Whichever account you pick, opening it early is what gives compounding the room to work.