If you are a young entrepreneur with an interest in the financial markets, you may wonder how old you need to be to trade on stocks and forex markets. In the US, the minimum age for trading shares is 18, but it can be up to 21 depending on which US state you live in. The minimum age is 18 in most states, although it is 19 in Alabama, Nebraska and Delaware and 21 in Mississippi.
For those under the age of 18, there is a simple solution that will allow you to buy and own shares and forex – custodial trading accounts. These accounts can only be created by your parents or legal guardians. Although the account will be the legal responsibility of your parents or guardians, they cannot use the assets deposited into the account for their own gains. They may, however, allow you to pick and choose the investments made inside the custodial account once it is funded. You will gain full control of the account once you reach legal age too.
Whether you want to start investing money to pay for your college studies, to set up a new business venture or simply to provide you with a retirement nest egg in the future, read on as we provide some handy hints you should know about trading with a custodial account.
Understanding more about your custodial account options
There are two options when it comes to opening investment accounts as a minor:
- Using UTMA or UGMA custodial accounts
Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) custodial accounts can be opened at any age with the consent of your parent or guardian. You will be the long-term “beneficiary” account owner, but your parent or guardian will be the initial account owner. You can buy stocks or any type of investment using UTMA and UGMA accounts.
- Using a Roth IRA
A Roth IRA account can also be opened with the help of a parent or guardian. It involves investing funds that have already been taxed by the IRS. This means that any growth you make in these accounts are tax-free. Some teenagers use Roth IRA accounts to invest for college funds when you start having to write essays and dissertations or for first home purchases. Do bear in mind that you must be aged 59-and-a-half before the funds can be withdrawn for non-educational or property acquisition purposes.
You might have to pay the so-called “Kiddie Tax”
If the income you make from investments in your custodial account is over $2,200, it’s highly likely that you will have to pay tax on these profits. You’ll be required to fill out and submit a tax return in the same way as your parents or guardians do.
This tax is known as the “Kiddie Tax”. It is based on your parent’s existing tax band, which could be as much as 39.6% of your income. It’s important to bear this in mind to avoid an unwanted investigation from the IRS.
Be sure to choose a brokerage that has mobile access
In years gone by, financial traders had to be glued to their desktop screens to monitor the financial markets. Thanks to state-of-the-art, responsive technologies this is now a thing of the past. Most forex brokers will offer mobile forex trading via apps or web browsers, which take only a few minutes to set up. The ability to access custodial accounts on your smartphone or tablet is clear. It gives you total freedom to make amendments to your investments wherever you are in the world, so long as you have a reliable internet connection.
Although custodial accounts aren’t a like-for-like alternative to trading accounts, it’s still an effective learning curve to get a feel for the markets and make notes on any technical analysis trends to put into practice in the future.