Custodial Accounts: How Teens Can Start Investing

Introduction

One of the biggest advantages any investor can have is time. The earlier you start, the longer your money has to grow. But if you are under 18, you usually cannot open a brokerage account on your own. The good news is that custodial accounts make it possible for teens to start investing with the help of a parent or guardian.

What Is a Custodial Account?

A custodial account is an investment account that an adult opens and manages for a minor. The adult, called the custodian, makes decisions about the account, but the money legally belongs to the minor. The two most common types are UTMA and UGMA accounts, named after the laws that created them. When the minor reaches a certain age, usually 18 or 21 depending on the state, they gain full control of the account.

Custodial Roth IRAs

If you have a job and earn money, a custodial Roth IRA can be an even more powerful option. You can contribute up to the amount you earned that year, up to the yearly limit. The money grows tax-free, and you will not pay taxes when you withdraw it in retirement. Starting a Roth IRA as a teen can give your investments decades of tax-free growth.

What to Invest In

Many teens start with simple, low-cost options like index funds or ETFs that track the whole market. These spread your money across hundreds of companies and reduce risk. Working with your parent or guardian, you can learn to research investments, track performance, and make decisions together. It is a great way to build knowledge and confidence before you invest on your own.

Things to Keep in Mind

Money in a custodial account is a gift to the minor and cannot be taken back. Larger investment earnings may be subject to taxes, sometimes at the parent's tax rate. Custodial accounts may also count toward financial aid calculations for college. Talk with your family about these details before opening an account.

Conclusion

Custodial accounts let teens start investing early with guidance from a trusted adult. Options like UTMA accounts and custodial Roth IRAs can give your money years of extra growth. Starting young, even with small amounts, can make a huge difference later in life. Your investing journey does not have to wait until you turn 18!