Can a 16 year old start investing?

Quick answer and legal basics for teen investing

Short summary

Yes, in many cases a 16 year old can start investing, but usually not with a standard, unrestricted brokerage account in their own name. Instead, common legal paths include a custodial account such as UGMA or UTMA, or a Roth IRA if the teen has qualifying earned income, and each route has rules and limits that matter for parents and teens to understand FINRA custodial accounts overview.

Custodial accounts let an adult manage assets for the child until state law requires transfer of control, and a Roth IRA is available to a teen with earned income up to the contribution limit and their earned pay, subject to IRS rules IRS Roth IRA guidance.

Who needs to be involved

A parent or other adult usually needs to be the custodian or co-signer on an account for a minor. This adult opens and manages the account while the teen is a minor and signs paperwork and tax forms as needed CFPB overview of custodial accounts.

Before you choose a path, check state transfer ages for UGMA/UTMA and confirm whether the teen has evidence of earned income if you are considering a Roth IRA, since those details determine which options are available.

What custodial accounts (UGMA/UTMA) are and how they work

Ownership and custodian role

A custodial account is opened by an adult for the benefit of the minor; legally the account holds the minor’s assets with the adult acting as custodian until transfer age, and the custodian manages investment choices and transactions while the minor is under that age FINRA custodial accounts overview.

That means the minor is the beneficial owner of the money, but the custodian signs for account actions and is expected to manage the assets in the child’s interest rather than for the adult’s personal benefit CFPB custodial accounts guide.

State transfer age and irrevocability

When money is placed into a custodial account, it is generally an irrevocable gift to the child and becomes the child’s property that must be transferred to them when the applicable state transfer age is reached; that age varies by state and can be 18, 21, or older depending on local law FINRA custodial accounts overview and state guides like UGMA/UTMA Age of Majority by state.

Because gifts are typically final once made, families should consider who will control money at transfer age and what that transfer could mean for college financial aid, spending plans, or other family goals; check your state’s rules for precise timing and any legal exceptions CFPB custodial accounts guide.

Roth IRAs for teens who earn income

Earned income requirement

A teen who earns wage income can contribute to a Roth IRA up to the amount they earned that year or the annual contribution cap, whichever is smaller; this makes Roth IRAs a useful option for working teens who want a retirement-oriented account in their own name but they must document earned income IRS Roth IRA guidance.

Earned income normally includes wages and self-employment pay, not gifts or investments, so the teen and guardian should keep pay stubs, W-2s, or clear records of self-employment earnings to show eligibility for contributions Fidelity learning center on teen investing.

Because Roth rules are set by the IRS, parents and teens should verify documentation expectations with the brokerage and retain earnings records for tax reporting if they plan to contribute IRS Roth IRA guidance.

Contribution limits and practical examples

Contribution rules are straightforward in principle: a teen may contribute up to their earned income for the year, capped by the annual Roth limit, so if a teen earned 800 dollars and the annual limit is higher, they could only contribute up to their 800 dollars in contributions for that year IRS Roth IRA guidance.

In practice, a modest regular contribution like small amounts from part-time pay can be a good learning tool; remember contributions to a Roth have different tax treatment than traditional IRAs and withdrawals rules vary depending on age and purpose, so treat a Roth as a long-term account Fidelity learning center on teen investing.

Teen brokerage and supervised accounts: what providers offer

Types of teen accounts from brokerages

Brokerages often offer several teen-friendly structures: custodial accounts where the adult remains the custodian, supervised or custodial youth accounts that include educational tools, and teen-linked accounts that grant limited trading rights but keep adult oversight; exact names and features vary by provider Fidelity learning center on teen investing.

These account types are designed to help teens learn while giving parents control over trades or limits, but the degree of teen autonomy differs significantly between products and can affect learning outcomes and risk exposure NerdWallet guide to teen investing.

Feature and fee differences to watch

When comparing brokerages, look for differences in fees, trading limits, available securities, educational materials, and whether the teen can trade independently or only with permission; fees and product constraints can materially change the value of an account over time NerdWallet guide to teen investing.

Ask about custodial transfer mechanics and how the provider handles account ownership at the transfer age, since some firms have specific procedures for handing control to the young adult and may charge fees that affect long-term balances Vanguard on UGMA/UTMA and Fidelity learning center on teen investing.

Step-by-step: how a teen and guardian can open and fund an account

Checklist before you open an account

Start by confirming whether the teen has qualifying earned income for a Roth IRA and by checking the state transfer age for custodial accounts so you know timing and control rules before money moves IRS Roth IRA guidance.

Decide how much you plan to invest or save, whether gifts will be involved, and whether the teen will have trading access; document these decisions and discuss expectations to avoid surprises at transfer age FINRA custodial accounts overview.

Practical steps with documents and funding

1) Choose the account type that matches your goals, then select a brokerage that offers that account and confirms its process for minors and custodians Fidelity learning center on teen investing.

2) Gather identification and income documentation: typically a parent’s ID, the teen’s birth certificate or social security number, pay stubs or W-2s if contributing to a Roth, and any other forms the brokerage requires, then complete the application with the adult as custodian and the teen as beneficiary or account holder as appropriate IRS Roth IRA guidance.

3) Fund the account by transferring money from a checking or savings account, setting up recurring transfers, or accepting gifts from family; remember gifts into a custodial account are generally final and become the child’s property FINRA custodial accounts overview.

4) Start with low-cost, diversified investments and use the account’s educational features if available; keep records of deposits, trades, dividends, and any tax documents you receive for future reporting Fidelity learning center on teen investing.

Choosing simple investments to begin with

Why start simple

Begin with straightforward, diversified funds to reduce the risk of large losses from speculative bets and to let time and regular contributions do the heavy lifting for growth Fidelity learning center on teen investing.

Simple investments are easier to track and teach core skills like dollar-cost averaging, rebalancing, and understanding fees, which are useful habits for long-term financial literacy NerdWallet guide to teen investing.

Examples: index funds, ETFs, and savings alternatives

Common starter choices are broad index funds and ETFs that cover a wide market segment, such as total market or S&P-type funds, because they provide instant diversification at low cost and are easy to buy within most brokerages Fidelity learning center on teen investing. See lists of micro-investing tools and apps like best micro investment apps for easy starter options.

For money that might be needed in the short term, a high-yield savings account or a short-term bond fund can be safer than stocks; align your choice with the teen’s time horizon and tolerance for swings in value NerdWallet guide to teen investing.

Taxes and reporting for minor accounts, including the kiddie tax

When investment income must be reported

Investment income in custodial accounts, like dividends and realized gains, may need to be reported on tax returns depending on amounts, and parents often handle filing or include details on their returns when rules require it IRS Roth IRA guidance.

Large gifts and growing investment income can create filing requirements and different tax treatments for unearned income, so keep records of contributions, dividends, and sales proceeds to make accurate reports if thresholds are met FINRA custodial accounts overview.

How the kiddie tax works in general terms

The so-called kiddie tax can apply to a child’s unearned income above certain thresholds and may tax that income at the parent’s marginal rate in some cases, which can change the tax outcome compared with ordinary child rates IRS Roth IRA guidance.

Because tax rules and thresholds change over time, families should verify current IRS guidance or consult a tax professional before making large transfers into a custodial account or expecting significant investment income FINRA custodial accounts overview.

Common mistakes and traps to avoid

Gift and control misunderstandings

One frequent mistake is assuming the adult can take money back from a custodial account; gifts are typically irrevocable and become the child’s property, so plan with that transfer in mind and discuss likely uses at transfer age FINRA custodial accounts overview.

Also avoid informal promises about money that depend on the child making certain choices later, since legal ownership means the child controls the assets at the transfer age and parents should set expectations accordingly CFPB custodial accounts guide.

Overly risky early trades

Teens sometimes chase single-stock bets or trading strategies that can produce quick losses; for beginners, high-fee accounts or speculative trades can erode learning and future balances, so prefer low-cost diversified options early on NerdWallet guide to teen investing.

Keep records and teach modest position sizing, and consider using supervised accounts that provide limits or educational checkpoints rather than full trading freedom until the teen demonstrates consistent good habits Fidelity learning center on teen investing.

Decision checklist: custodial account, teen-linked brokerage, or Roth IRA?

Quick comparison table to write into your notes

Ask these questions: does the teen have earned income this year; how long will money stay invested; how much control should the teen have now and later; will gifts be irrevocable; and how will taxes be handled at your expected balances IRS Roth IRA guidance.

Compare fees, educational features, transfer mechanics at the custodial age, and whether the choice aligns with college planning or other family goals before committing funds FINRA custodial accounts overview.

Questions to answer before choosing

Write down simple answers to: will the teen be working regularly; is the money likely needed before the transfer age; do you want the teen to learn investing hands-on; and what tax filing will be necessary if investments produce income Fidelity learning center on teen investing.

Use those notes to match your priorities to an account type, then check broker fine print and state law before opening an account.

Real examples: three short scenarios families can relate to

Scenario A: allowance saver

A 16 year old who receives a small regular allowance and has no earned income could start with a custodial account where the parent deposits allowance money for regular investing in a broad ETF or index fund, giving the teen a chance to learn without the need to document earnings FINRA custodial accounts overview.

This approach teaches basic habits like setting a contribution cadence and checking statements, while the custodian handles account administration until transfer age Fidelity learning center on teen investing.

Scenario B: part-time worker who can use a Roth IRA

A teen with part-time wages documents earned income with a W-2 or pay stubs and contributes a portion of that income to a Roth IRA, using low-cost funds; this keeps the money in a retirement account with tax-advantaged growth potential, subject to Roth rules about contributions and withdrawals IRS Roth IRA guidance.

Because a Roth requires earned income, the teen should keep proof of pay and confirm the brokerage’s process before sending funds for a contribution Fidelity learning center on teen investing.

Scenario C: gift-funded custodial account

If a relative gives a larger sum into a custodial account, the money legally belongs to the child and will transfer at the state transfer age, so the family should check tax implications, plan how the teen will use the money later, and consider potential effects on need-based aid CFPB custodial accounts guide.

Large gifts may also create tax reporting needs if investment income grows, so involve a tax professional if amounts are significant FINRA custodial accounts overview.

How to document earned income and what proofs brokers and the IRS may accept

Common proof documents

Brokers and the IRS commonly accept W-2s, pay stubs, or tax forms as evidence of earned income, and some brokerages may accept signed statements for small self-employment or gig work if properly documented IRS Roth IRA guidance.

Keep copies of pay stubs, W-2s, invoices, and any bank records showing deposits tied to earned work so you can show the amount of earnings available for Roth contributions and support tax filings if needed Fidelity learning center on teen investing.

If income is informal or from gig work

If income comes from informal or gig work, document hours, invoices, and how the money was paid; some brokerages accept this documentation for Roth eligibility but requirements can vary so check with the provider first NerdWallet guide to teen investing.

For self-employment, keeping a simple ledger and filing a tax return when required helps both eligibility and long-term financial habits.

When to save first and when to start investing

Emergency fund and short-term goals

If the teen has short-term spending needs or no emergency cushion, prioritize a small savings balance before committing all money to investments that can lose value in the short run; a few months of small cash reserves in a savings account can prevent selling investments at a loss Fidelity learning center on teen investing.

Time horizon and investment readiness

Longer time horizons allow more exposure to stocks and equity funds, while very near-term needs suggest safer, liquid options; balance the teen’s readiness to handle volatility with the desired growth and the family’s tolerance Fidelity learning center on teen investing.

Start small, increase contributions as habits form, and review investments periodically rather than reacting to short-term market moves.

Next steps, key resources, and a simple action plan

Short action plan for the next 30 days

1) Verify your state’s custodial transfer age and identify whether a custodial account or a Roth IRA matches your goals FINRA custodial accounts overview.

2) Confirm earned income documentation if planning a Roth contribution and compare brokerage options for fees, features, and custodial handling before opening an account IRS Roth IRA guidance.

Where to verify rules and get primary sources

Check the IRS for Roth rules and contribution guidance, FINRA for custodial account overviews, and the CFPB for practical consumer explanations about custodial accounts to confirm the facts before you act CFPB custodial accounts guide.

FinancePolice provides plain-language articles to help you compare options and decide next steps, but verify legal and tax details with primary sources or a tax professional for your specific situation.

References

• https://www.finra.org/investors/learn-to-invest/types-investments/custodial-accounts-ugma-utma
• https://www.irs.gov/retirement-plans/roth-iras
• https://www.consumerfinance.gov/consumer-tools/banking/children-and-teens-open-bank-accounts/custodial-accounts-for-children/
• https://www.fidelity.com/learning-center/personal-finance/teens-investing-custodial-accounts
• https://www.nerdwallet.com/article/investing/teen-investing
• https://financepolice.com/advertise/
• https://financepolice.com/
• https://financepolice.com/best-micro-investment-apps/
• https://financepolice.com/robinhood-vs-acorns-vs-stash/
• https://www.capitalgroup.com/advisor/account-resource-center/ugma-utma/age-of-majority.html
• https://finaid.org/savings/ageofmajority/
• https://investor.vanguard.com/accounts-plans/ugma-utma