It's generally a good idea to help start your children down the path to financial independence early on in their lives, but an underage person cannot open a brokerage account on their own.
It is possible for an underage person to have a brokerage account with their own name attached to it, however, if a parent or guardian is involved with the account. There are a few different ways this can happen.
Friends and family may contribute up to $15,000 per child each year free of gift-tax consequences ($30,000 for married couples) to a child's UGMA/UTMA account.
Opening a Guardian Account
A parent or guardian of an underage child can open what is called a guardian account for the child. Essentially, this is an account in the parent's name, with legal title to the assets in the account, as well as all capital gains and tax liabilities produced from the account belonging to the parent. In this situation, the parent has total ownership and control of the brokerage account and attached the child's name to the account without any legal standing coming with it.
- A custodial account allows adults to open an account for a minor with many options for investing the funds.
- Custodial accounts can be opened at many financial institutions—banks, investment brokerage houses, and credit unions, for example.
- You cannot open an IRA account in a child’s name, however, a child can open their own when they start earning taxable income.
- Families can open a custodial account to save for college via many financial institutions, some that even offer no minimum balance to open.
Opening a Custodial Account
Another way a child can have a brokerage account in their name is through what is called a custodial account. In this type of account, the child owns the assets contained within the account, but the parent has control of the investment decisions and any withdrawals which might be made.
However, it's important to note that with this type of account, withdrawals or capital gains tax liabilities are taxed in the child's name—not the parent's. Of course, this can be an advantage over the guardian account (in which taxes fall under the parent's name, at their marginal tax rate), since children often pay little to no taxes due to their typically low annual incomes.
Custodial account minimum account balances and interest rates vary by company. Anyone can contribute to the custodial account. Once the minor reaches adulthood, account ownership transfers from the custodian to the minor. However, once the minor reaches adulthood, the minor can decide when and how to use the money.
Opening an IRA Account
If a child has already been earning an annual income and has previously filed their taxes, then they would be eligible to open an IRA account with their parent's help. But this is only in the cases where a child has claimed earned income for at least one year already, since IRA accounts require that the account owner has earned income.
Example of a Custodial Account
There are two types of custodial accounts: the Uniform Transfers to Minors Act (UTMA) and the Uniform Gift to Minors Act (UGMA) accounts. These are similar, yet the difference between them is in the type of assets one can contribute to them.
A UGMA account can include cash, stocks, mutual funds, or insurance policies. A UTMA account is more flexible and may include any type of asset, including works of art, real estate, or even intellectual property like royalties from a book.
The Bottom Line
Every state in the union allows for UGMA accounts, but, interestingly, South Carolina does not allow UTMA accounts. These two types of custodial accounts are created in a child's name with the guardian or parent acting as custodian. Age limits for accessing the accounts are on a state-by-state basis for a UTMA but are typically anywhere from 18 to 24 years of age. Minors may not be able to open their own brokerage accounts, but family and friends can help them set up custodial or guardian accounts, and when a child begins to earn income (for at least one year), they can open an IRA.