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Written by Ed Canty, CFP® on May 30, 2024
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How to Invest As A Minor Or Teenager (Under 18 Years Old)

Learning how to invest as a minor can give you a tremendous head start for your financial future. 

Early investing can have huge benefits, and teens who learn responsible money habits have a huge advantage over their peers.

If you are a teenager - or perhaps a parent of a teen - and want to learn more about how to invest as a teenager, you are in the right place. 

Take it from one of the greatest investors of our time; Warren Buffett. He once said, “the best time to plant a tree was 20 years ago, the second-best time is now.”

As a teenager, you have decades ahead of you to allow your money to grow and compound. The earlier you start, the better off you'll be in the future.

Here are a few ways to start investing as a minor.

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Can You Invest If You Are Under Age 18?

Let's start by dispelling a common misunderstanding. Many people think they can't begin investing until they are an adult over age 18.

This is actually false!

While you can't open your own solo investment account as a teen, there are certain types of accounts offered to minors that can be established by a parent or guardian.

Some of these accounts can help you save for long-term goals such as education and retirement. The most common type of account is a custodial account.

Check out our video on investing as a teenager below!

Setting Up A Custodial Account UGMA/UTMA

In order to invest as a teen, you'll need to set up a custodial account with a parent or guardian.

Minor accounts, created in part by the Uniform Transfers To Minors Act and the Uniform Gift To Minors Act (UTMA/UGMA), are excellent options if you are investing for your teenager.

You can establish these minor accounts and begin investing within them almost immediately.

This money can be used for any purpose including education expenses as well as any other needs the child may have. 

The profit from these investment accounts will be taxed according to the child's tax rate or potentially the parent's tax rates if the child makes enough money and is subject to kiddie tax limitations.

Where To Open A Custodial Account

If you're ready to get started with a custodial account, one of the best options is M1 Finance.

M1 Finance offers an intuitive investment platform with the ability to invest in individual stocks, or pre-built portfolios.

They also offer retirement accounts, which is something you might want to leverage too.

In addition, for custodial accounts the minimum investment to get started is just $100.

Click Here to learn more about M1 Finance Custodial Accounts!

Transferring The Account Over

The parent or guardian has the final decision over the account until the child reaches 18 or 21 (depending on the State).

At the age of majority, ownership of the account will be transferred fully to the child and the parent will no longer have any control over the account.

The child (who would now be an adult) will be free to cash out the account or do whatever they please, so it's important to talk about the intended purpose of the account beforehand.

Retirement Plans For Teenagers And Minors

Retirement plans are a great way to save for your future.

No matter what, if you are investing for a teenager or as an adult, it's never too early to start planning for retirement.

The earlier you begin planning, the better off you will be. That's why many people gravitate towards these accounts when investing on behalf of a minor or teenager. 

There are many different types of retirement accounts, but the most popular are the Traditional IRA and the Roth IRA.

Traditional IRA

The Traditional IRA is a tax-deferred retirement account. This means you contribute to the account with pre-tax dollars.

When you take distributions in retirement from a Traditional IRA, you will pay ordinary income taxes. 

With a Traditional IRA, the benefit is upfront. In most cases, you are able to deduct the contributions made to your Traditional IRA.

This means your taxable income would be lower for that tax year. However, you do have to pay taxes later on when you take money out of the IRA.

Roth IRA

Roth IRAs are slightly different, as contributions are made with your post-tax income. 

This means the account grows tax-free. In addition, when you take distributions in retirement - they will be completely tax-free. 

With the Roth IRA, the benefit is experienced at the end. You aren't able to deduct your contributions and lower your tax bill upfront.

Typically, younger people tend to gravitate toward Roth IRAs because they assume that they are in a lower tax bracket now than they will be in the future.

For example, if you're currently paying 12% in taxes and assume that in the future you'll be in a 25% tax bracket, you'd be better off to pay the 12% now instead of 25% later.

You can read more about the Roth IRA and the benefits here.

IRA Distributions

For both Traditional and Roth IRAs you cannot take a qualified distribution until age 59 ½.

If you take an early distribution, you will be subject to a 10% penalty and income taxes.

However, there are certain exceptions to the early withdrawal penalty - such as using the money for medical expenses or the First Time Home Buyer exemption.

You will want to look into these exemptions individually to learn more.

Minor Traditional IRAs And Minor Roth IRAs

With both Traditional IRAs and Roth IRAs, your child will need to have earned income.

Without earned income, you are not allowed to contribute to an IRA.

So if you're thinking of contributing to a Roth IRA for a younger child or teen, you might need to find creative ways for them to earn income.

Opening A Minor Roth IRA

You can set up Minor Roth IRAs at a variety of brokers.

There are many options available, including:

  • Vanguard
  • Fidelity
  • Charles Schwab
  • TD Ameritrade

Coverdell Education Savings Accounts And 529 Plans

You can also invest in qualified education savings accounts for your teen.

Planning for your teen's education is a good way to stay ahead of hefty college expenses.

529 Education Savings Plan

First, let's explain the 529 Plan.

This is a savings plan offered by most states that allows individuals to save for college or k-12 education expenses.

You can also use 529 plans to pay student loans and internship programs.

The annual contribution limit for 529 plans is $18,000 and most States offer a tax deduction for your contribution. 

Distributions within these accounts are tax-free by the IRS if used for qualified education expenses.

Parents, guardians, grandparents, or even family friends can establish a 529 account and choose their specified beneficiary. 

If a child decides not to attend college or there are excess funds in a 529 plan, the funds can easily be transferred to another family member or be withdrawn for non-education usage.

If you choose to withdraw funds for non-education expenses, there will be a 10% penalty on any earnings in the account in addition to taxes owed.

Coverdell Education Savings Account (ESA)

An ESA is a savings plan established by the federal government which allows individuals to contribute up to $2,000 per year per beneficiary.

Unlike a 529 plan, there is no tax deduction for the contribution.

Similar to a 529 plan, distributions will be tax-free if used for qualified education expenses. However, the ESA must be used before the beneficiary reaches age 30 or you will be subject to tax and penalties.

Contributions to ESA accounts may also be subject to income phase-out limitations. This means if you make over a certain amount of money, you will not be eligible to contribute. 

Similar to 529 plans, these funds can either be used for K-12 private education or college expenses.

Currently, there are not many compelling reasons to choose an ESA over a 529 plan.

In most cases, people will choose the 529 Plan over the ESA.

Final Thoughts

As a teenager - or the parent or guardian of a minor - there are many options available to begin investing early on.

While you will need the help of a parent or guardian, you can begin your investing journey as early as you wish. This means you can start investing as a young person and experience many decades of compounding.

There may be a few hoops to jump through, but you will thank yourself later on.

Article written by Ed Canty, CFP®
Ed is a CERTIFIED FINANCIAL PLANNER™. At his day job, Ed helps clients plan for retirement, manage their investments, and navigate their tax situation. In his free time, Ed enjoys golfing, traveling, fishing, and wrenching on his old car.

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