If you’re a teenager and start investing today, you’ll be getting a big jump on where your finances should be when you’re an adult, even with modest gains. Although today there are headlines of the stock market crashing and uncertainty about the economy, that doesn’t mean you shouldn’t invest. In fact, a downturn in the market at times is normal. By investing when you’re still a teenager, you’ll build an incredibly broad investment portfolio a lot sooner than you think. Here’s our guide to how to invest as a teenager.
How Old Do You Have To Be to Invest In Stocks?
You must be 18 years old to start investing in stocks according to the brokers we’ve reviewed at Investor Junkie.
There are many investment apps that would be perfect for teenagers to use, however the law requires that you be 18 years old to participate. There is no way to get around this restriction.
Check out our eBook – Personal Finance for Teens – for our best investing advice!
How Can You Get Around this Roadblock?
A North Carolina high school student, Sudarshan Sridharan, made headlines in 2016 for earning $17,000 by betting on Tesla’s stock rise. He also earned $14,600 by investing in Google and an additional $5,600 on Netflix. All of his gains were earned within three years.
Sudarshan invested in a custodial account that was opened and maintained by his dad.
These accounts enable you to invest through an adult. Once you reach 18 or 21 years old (depending on your state’s laws), the account will revert to your name. By then, you’ll be adult enough to manage the account on your own.
So let’s talk about custodial accounts.
How Custodial Accounts Work
The first $15,000 is not taxed upon gift. A parent or guardian can open a custodial account for you and then “gift” funds into it. For 2020, up to $15,000 can be gifted into a custodial account without being taxed.
Once the money is in the account, your parent or guardian can begin investing it. They will retain management control over the account and as a teenager, you cannot contact the account broker to execute your trades.
You have the ability to be involved in the investment process by allocating a portfolio, choosing asset classes, and even making specific investments.
When you turn the legal age in your state, the account will become yours. It is hoped that you will have gained some experience from the custodial arrangement which will allow you to manage the account from this point onwards.
Learn to Diversify Your Custodial Account
Once you get a custodial taxable or IRA account, you need to decide what mix of investments will work best for you.
There are many different types of investments, from simple-to-understand equities to complicated derivatives. We think it’s best to start with a simple investment.
1. Start With Stocks
You don’t need to be an expert to start investing in stocks. In fact, by researching stocks and learning about which ones to invest in, you can gain a better understanding of how the stock market works.
Choose a company to invest in that you both enjoy and trust. Being able to say you own part of a stock like McDonald’s or The Walt Disney Co. can be fun, but it’s also important that these companies are historically steady earners.
Some stocks on the Dividend Aristocrat list may be worth investing in because they are from companies with proven histories of increased dividend payouts, such as Coca-Cola and Target. These companies distribute cash quarterly or annually, on top of the gains from selling the stocks.
If you’re uncomfortable with the way large corporations operate, you can choose to invest in sustainable industries and support small businesses instead. Here’s some more information on ethical and sustainable investing.
2. Move on to Low-Cost Mutual Funds
After you understand the basics of stock trading, you can begin to invest in mutual funds. Mutual funds are a collection of stocks from different companies, so you are not relying on one company for all of your gains. This allows you to spread your risk out and not have all your eggs in one basket.
The best mutual funds for new investors are those which are diverse and offer exposure to different industries and markets. Many stock brokers offer their own mutual funds which don’t have high commissions.
3. Open a High-Yield Savings Account
If you can’t convince your parent or guardian to open a custodial stock broker account for you, consider asking for a high-yield savings account instead. Although you won’t earn the potential gains you can get from the stock market, savings accounts are a low-risk way to steady money from compound interest.
The interest rates offered by online-only banks are much higher than those at local bank branches.
4. Use a Microsavings App
If you have a checking account, you can link it with a microsavings app so that you can save and invest the change from every purchase made with your debit card.
You can set up a microsavings app to automatically round up your spare change and invest it. For example, if you spend $2.68 on a soda and a bag of chips every day after school, the app will automatically invest 32 cents. Over the course of a month, this can add up to more than $6, which can lead to greater gains over time.
There are many microsavings apps available, but Acorns is especially good for teenagers. There is no minimum amount required to open an account, and there are several ways to save extra money. Your parents can open an Acorns Family account for both of you for only $5 per month.
Choose the Right Custodial IRA Plan
Custodial Traditional IRAs
If you’re investing for long-term growth, you can set up an individual retirement account (IRA). Not many people know that you can get an IRA when you’re a teenager.
Compound interest is like a gift that keeps giving. It allows your money to grow over time. For example, if you contribute $5,500 per year to a traditional IRA at ages 15, 16, and 17, you will have $16,500 in the account. If you make no further contributions, your money will continue to grow.
If you save regularly and earn an average rate of return of 8% per year, you could have $773,877 by the time you reach full retirement age (67).
The only requirement for contributing to a traditional IRA is that you earn income. For 2018, a teenager can contribute up to $5,500 of their earnings each year to a traditional IRA.
The returns on your investment in an IRA will grow without being taxed, however there are some benefits to taking the money out before retirement. For example, if you use the funds to buy a house there is no penalty.
Custodial Roth IRAs
A custodial Roth IRA for a teenager works the same as a traditional IRA would. The teenager can make annual contributions of up to $5,500.
The biggest difference between a traditional and Roth IRA is that your contributions to a Roth IRA are not tax-deductible, but the distributions from your account will be tax-free.
However, with a traditional IRA, you must wait until you’re at least 59 1/2 to withdraw your contributions without paying regular income tax or the 10% penalty. One significant difference between Roth and traditional IRAs is that after five years, you can withdraw your Roth contributions free from regular income tax and the 10% early withdrawal penalty. With a traditional IRA, you must wait until you’re at least 59 1/2 to make such withdrawals without penalty.
If you begin withdrawing money from your Roth IRA account before you have fully withdrawn your contributions, you will have to pay income tax and penalties on the earnings. This is referred to as the Roth IRA ordering rules.
A Roth IRA accounts allows you to have tax-deferred investment income as well as contributing to a retirement plan, however you are able to withdraw the funds earlier if it is necessary. This is especially important for young people and might make a Roth IRA more appealing than a traditional IRA.
An investment company that offers Traditional IRAs usually also offers Roth IRAs.
Custodial IRAs Revert to the Teenager Upon Reaching Legal Age
The IRA account is in the parent or guardian’s name when the teenager is considered a minor. However, when the teenager reaches the age of 18 or 21, the account ownership converts to the teenager, depending on where they live.
Threading investment experience through your teenage years has benefits when you take over the account at 18.
If you invest while you are young, you will be more investment savvy than your peers and you will have the benefit of a growing investment account.
Robo advisors don’t offer custodial IRAs, which is too bad because they could be the perfect IRA choice for teenagers. They are not, however, the best learning tool for investment purposes.
Even if you don’t have much money, you can start by opening a custodial IRA through a broker. When you reach the legal age, you can transfer the account to a robo advisor if you want.
Expert-Backed Guide for Teen Financial Success – Claim Your Copy!
Consider Taxes & Fees
Although your account will not be tax-exempt, it will be taxed at your tax rate. This is often beneficial as your tax rate is likely lower than your parents.
Here’s the tax liability if you’re under 19 years of age:
- The first $1,050 of investment income is tax-free.
- The next $1,050 is taxed at 10%.
- Any income in excess of $2,100 is taxed at your parent’s marginal tax rate, which could be as high as 37%. This is what is often referred to as the “kiddie tax.”
Parent-teen conversations about money can have a big impact on how knowledgeable and confident teens feel about money matters. In fact, teens who have talked to their parents about investing are more than twice as likely to say they feel confident about financial topics, and much less likely to feel that investing is out of reach. To encourage families to make “money talk” a bigger part of parent-teen relationships, Fidelity has developed a new conversation guide to go with the Fidelity Youth Account. This account is the first-of-its-kind brokerage account that puts saving, spending, and investing decisions into the hands of teens.
According to John Boroff, vice president of Youth Investing at Fidelity Investments, parents play an important role in giving their teenagers the confidence they need when it comes to money matters. He says that teens who have discussed investing with their parents are more likely to have a checking or savings account, and to talk about investing with friends or teachers. Ultimately, this could lead to them starting to invest themselves. The Fidelity Youth account is designed to help get these conversations started and to give young people some practical experience with money, but Boroff stresses that it is vital for parents to be prepared to talk to their teens about these things.
To help teens and parents along their investing journey, Fidelity offers:
- The Fidelity Youth Account, an award-winning4 brokerage account for teens, includes educational content about saving, spending, and investing in the Youth Learning Center within the app. For a limited time when parents open a Fidelity Youth Account for their teen, they will get a $50 reward. Terms apply.
- A new conversation guide to make money a positive part of daily family discussions.
- Webinars designed for teens and parents to join together, including the recent “Getting a head start: investing for teens and parents” session.
- A Teens and Money learning path with comprehensive content including articles on saving and budgeting and investing basics, and the free online game Five Money Musts.
- Viewpoints articles including Investing basics for teens (five tips to introduce your teens to investing) and Be a great money role model (six tips to help parents avoid common money mistakes with kids and teens).
- A collaboration with The FIVE Network that provides thousands of diverse youth ages 13-17 across 25+ states with an online financial services curriculum, mentorship with members of Fidelity’s Affinity groups focused on engaging Black, Latin, and young professionals, and an introduction to the Fidelity Youth Account to apply what they’ve learned.
- A presence on Reddit, TikTok, and other social channels where teens can easily engage with Fidelity on financial topics.
This study presents the findings of an online sample of 2,014 13-17 year-olds that were selected from among those who have volunteered to participate in online surveys and polls. The study was conducted by ENGINE INSIGHTS from April 19-26, 2022 and has a margin of error of +/- 2.18% at a 95% confidence level.
Fidelity’s goal is to improve the lives of their customers and the businesses they work with. With over $10.5 trillion in assets and $4 trillion in discretionary assets, they are focused on meeting the specific needs of their diverse customer base. They have been a private company for over 75 years and employ more than 58,000 people who are committed to the success of their customers.
Start Sooner Rather Than Later
If you want to start investing while you’re still a teenager, ask your parent or guardian to set up a custodial investment account for you. That way, you’ll have time to learn the basics of investing and build up a small portfolio. When you reach adulthood, you’ll already have a head start. If you’re interested in investing, you can check out our how-to invest guide for beginners.
Homeschooling moms, the experts agree: "Personal Finance for Teens" is the must-have eBook that sets your teens up for a financially secure future.
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