There are many ways to start diving into stocks as a beginner. You may wonder how you can start investing as a minor. A very popular way is setting up custodial brokerage accounts.
Custodial Brokerage Accounts:
Custodial accounts are set up by your parents or guardians for the benefit of minors under the age of 18.when the minor turns 18-21 gains full control of the custodial account. An adult is appointed as the custodian of a custodial account until you reach the appropriate age. The custodian has sole responsibility to manage assets for the minor until the custodianship ends.
Two Types of Custodial Accounts:
There are two types of custodial accounts. The Uniform Transfer to Minor Act (UTMA) and the Uniform Gift to Minor Act (UGMA) accounts. These two accounts are similar, yet there is a difference between them in the type of assets one can contribute to them. A UGMA account can include cash, stocks, mutual funds, insurance policies. A UTMA account is more flexible and may include any type of assets, including works of art, real estate, or even intellectual property like royalties from a book.
Pros:
These accounts are free from income, contributions, or withdrawal limits and can invest in a variety of assets. They are also easy to establish and manage. Custodial accounts offer a convenient way to make a financial gift to you if you have one. The income of a custodial account is taxed to you. Sometimes, this is an advantage if you as a child pay tax at a lower rate than your custodial parent. However, there is also kiddie tax to watch out for.
Cons:
When you have a custodial account, the money is technically no longer your parents’. The money is now your money and can only be used for purposes that benefit you as the beneficiary. You will gain complete control over the money when you reach adulthood, which may differ from state law. The child might need to file taxes if they make enough unearned income.
Written by Anna Li