While there's no bar to a minor investing in shares, you can't open an online brokerage account on your own. You'll need a parent or guardian to open an account with your name attached to it. There are two options when it comes to opening an account: a custodial account that you own and control, or a guardian account where the parent keeps ownership. The main difference between these options is the tax rate.
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Understanding the Guardianship Account
When a parent or a guardian opens a guardian account on your behalf, the account stays in the adult's name. All assets in the account, as well as its tax liabilities, belong to the guardian. While your name is attached to the account, you have no legal ownership or control over the assets. Parents typically choose this account when they want to dabble in investing and ring fence the funds for their child to access when she's old enough.
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Understanding the Custodial Account
A custodial account is quite different from a guardian account. A parent or a guardian must help you open this account as well, but all assets in this account belong to you, not your parent or guardian. Until you turn 18, the guardian has legal control over the account, but the assets in this type of account are taxed at your rate, not your parent's. In other words, you own the account and the parent has far less long-term control. This account is more appropriate where the minor is old enough to take control and do her own investing. All she needs is a parent to physically open the account for her.
Tax Considerations are Key
A guardian account is taxed at your parent's rate, while a custodial account is taxed at your rate. If your tax rate is lower than your parent's — and it usually is — a custodial account is the best choice. Be careful, however, since people under the age of 24 are subject to the so-called "kiddie tax," which progressively raises their taxes at a faster rate as the account size grows. This may negate the advantage of a custodial account if the account is too large.
Starting IRAs
Another alternative is to open an IRA account. People under 18 are eligible to buy stock in an IRA account under one condition — you must have an earned income. If you have a job and want to invest in a tax-deferred account, you can contribute up to $5,000 per year into an IRA account. If you wish to save and invest money for college, you can also open an Education IRA, which allows you to contribute an additional $2,000 per year. Stocks can be bought and sold inside IRA accounts.