financial literacy

How Old Do You Have to Be to Invest?

April 4, 2022

There are a lot of investment opportunities out there. Thanks to the rapid rise of cryptocurrencies and investment apps, an increasingly large proportion of young people now have the ability to learn about investing and start trading.

Unfortunately, investing as a teenager isn’t always easy. There are a lot of rules and restrictions that dictate how old you have to be to invest in the stock market, various securities, and even crypto.

But, as always, there are a few workarounds that adults can use to help kids invest.

This guide explains how old you have to be to invest in the stock market, how old you have to be to invest in crypto, and the best ways for kids to invest.

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How Old Do You Have to Be to Invest in Stocks?

If you want to invest on your own, you need to be 18 years or older. If you’re under 18 years old, you can still invest — but you’ll need help from a parent or guardian to do so.

Why do you have to be 18 to invest?

If you want to buy and sell stock shares or other securities on the stock market, you’ll need to set up an account with a brokerage first. Unfortunately for financially literate teenagers, you need to be at least 18 years old to set up a brokerage account. 

That means children under 18 can’t invest in individual stocks in most jurisdictions — or at least not directly. 

Although you can’t buy stocks as a teenager, it’s completely legal for you to own shares of publicly traded companies. You just need an adult to buy those shares and transfer them to you via one of several various investment options.

But we’ll get to that in just a minute.

Can I invest if I’m 16?

It’s possible to start investing indirectly as a 12-year-old, 14-year-old, 16-year-old, or any other age under 18. You just can’t set up a brokerage account and do it yourself.

Illustration of girl placing coins in piggy bank

How to invest in the stock market as a child

Popular types of investment vehicles adults can use to help children invest in the stock market include UGMA custodial accounts, 529 plans, and custodial Roth IRAs.

A UGMA custodial account is a dynamic and tax-efficient investment tool that enables an adult to buy and hold assets like stock shares, exchange-traded funds (ETFs), mutual fund shares, and bonds. You can also invest cash in a pre-tailored portfolio of securities, which includes a combination of stocks, bonds, and ETFs for a child.

When you set up a custodial account, the adult needs to name someone under the age of 18 as the beneficiary of that account. As the adult, you then serve as the custodian of that account. You make deposits or investments and manage the account until the child reaches the age of majority in their state (normally either 18 or 21).

Because everything in the investment account belongs to the child beneficiary, earnings generated by custodial accounts are taxed at the child’s tax rate (up to a certain threshold).

For 2022, the first $1,150 of a child's unearned income qualifies for the standard deduction. Meanwhile, the next $1,150 is taxed at the child's income tax rate. Any unearned income above $2,300 will get taxed at the parent’s marginal income tax rate.

Because a child’s tax rate is normally lower than the tax rate of their parent or guardian, this represents big tax savings for a lot of families.

A 529 college savings plan is a tax-efficient state plan that lets you invest cash toward a child’s future education expenses. The funds you invest in a 529 plan are then able to grow tax-free, and you won’t be taxed on any withdrawals as long as you’re taking out money for a “qualified education expense.”

If you try to take cash out of a 529 for any other reason — or the child you’ve invested for chooses not to go to college, and you decide to cash out — you’ll need to pay taxes on it (and potentially a penalty fee).

A custodial Roth individual retirement account (IRA) is a retirement account an adult can set up for a child with some sort of income. For example, if the child in your life earns money babysitting or mowing lawns, you can deposit that income on their behalf into a Roth IRA.

That money can then grow tax-free, and the child can make withdrawals without getting taxed — but only after they reach retirement age. It’s also important to note that Roth IRAs generally have a pretty low contribution limit, so it’s probably not going to help you build a huge nest egg for a child’s future through investment.

Regardless of the investment vehicle you choose, the key takeaway here is that you need to be at least 18 to invest in the stock market on your own. But with the help of a parent, guardian, grandparent, aunt, uncle, or any other adult, as well as certain investment vehicles, under-18s can indirectly invest in stock shares.

How Old Do You Have To Be To Invest In Crypto?

Just like investing in the stock market, age restrictions around investing in crypto are a little bit gray.

Generally speaking, there are no age restrictions for trading in cryptocurrencies (or “crypto”).

That means a teenager could theoretically invest in crypto directly.

But just like brokerages, any reputable crypto exchange or crypto-friendly site like Gemini, Paypal, and Coinbase require you to be at least 18 before you’re allowed to directly buy or sell crypto. Although this is disappointing for a lot of tech-savvy teens, it’s a measure exchanges bring in to make sure kids and their money stays safe.

That being said, it's possible to invest in crypto before you hit 18. You’ll just need help from an adult.

Screenshot of mobile view of EarlyBird Crypto

There are a couple of options here — and until recently, your best bet as a child investor would be to have an adult buy crypto using a digital wallet. The adult would then transfer the contents of that digital wallet onto a “cold wallet” that was 100% offline. A child could then hold onto that cold wallet until they were old enough to set up their own digital wallet and start trading.

But there are a couple of risks that go together with cold wallets and kids (such as losing them). This is where EarlyBird Crypto makes life a whole lot simpler.

EarlyBird Crypto is a new offering that lets adults invest in crypto like Bitcoin or Ethereum for a child. 

It works pretty similarly to EarlyBird’s UGMA account. An adult can choose to set up a crypto wallet supported by our partner and industry-leading exchange Gemini, and then the adult can invest in crypto on the child’s behalf.

EarlyBird Crypto allows adults to invest in crypto for a child. But it also lets the adult continue to manage the investments on the child’s behalf until they’re old enough to make their own financial choices.

What’s the Best Way For Kids to Invest?

No two families are 100% alike, and so the best investment vehicle for one child might not be as good a fit for others.

Illustration of man with arm around son next to pile of money

You should consider several factors, including:

  • Your investment objectives
  • Risk appetite
  • How much you can afford to invest
  • Desired asset mix
  • Tax benefits
  • Compound interest

There are a lot of options out there.

But if you’re looking for a tax-efficient vehicle that lets you help a child invest through uncapped contributions, a healthy asset mix, and risk levels that place you in control, setting up a UGMA account is probably going to be your best bet.

With a UGMA account, you’ll enjoy a couple of key tax benefits. You can gift up to $16,000 per person per year to a child's UGMA account without having to pay tax on that gift. This is what’s known as the IRS Gift Tax.

You can also continue to invest as much cash (or as many assets) as you’d like to into a custodial account beyond that annual gift tax limit because UGMA accounts have no contribution limits.

With a UGMA account, you’ll also benefit from the Kiddie Tax — which can save families a lot of money in terms of tax liabilities. 

This is the IRS rule we’ve already touched upon, which says any unearned income a UGMA account generates (such as through dividends or compound interest) is taxed at the child’s lower tax rate up to a certain threshold. 

Simply put, that means you’ll end up paying no tax until the child’s unearned income goes above $1,150, and then you’ll pay the child’s income tax rate until the account’s unearned income hits the 2022 threshold of $2,300.

As long as the child in question earns less than $83,550 per year, that tax rate is normally between 10-12%.

Conclusion

Investing as a young person can be incredibly rewarding — but tricky, too. Because stockbrokers require people to be at least 18 years old to set up a standard brokerage account, you need to be 18 or older to invest directly in the market and start trading stock.

The same rule applies to crypto investments. Any legitimate crypto exchange is going to require you to be 18 years or older to set up a digital wallet.

But with the help of an adult custodian, children can invest in a range of securities (and even crypto).

There are a lot of investment vehicles available to help a child invest — but if you’re after a tax-beneficial investment vehicle, you should definitely check out a UGMA.

Ready to start investing? Download EarlyBird now.

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