Can You Really Start Investing As a Teenager?

As a general rule, the younger you are when you start investing, the easier it is to wind up with a decent pile of money later in life. This is because compounding has more time to work its magic, giving those earlier dollars the chance to double that many more times along your journey.

The incredible value that comes from starting early raises a key question: exactly how young can you get started? Can you really start investing as a teenager (or even earlier)? The short answer is yes, it’s possible, but in practice, it’s a bit more complicated than that.

Image source: Getty Images.

Youth and custodial accounts

First, the simple case: 18 and 19 year olds are teenagers, but in most states, they’re considered adults capable of signing their own contracts and opening their own investment accounts. For them, the process is pretty much the same as it would be for any other adult to get started investing.

For a child or teenager below the age of majority (usually 18) to own stocks, it gets a little more complicated. Those investments are held in a custodial type account. Those accounts are often known as a Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts.  Assets in those accounts are considered property of the child. While a parent may be a custodian for those investments, they must be managed on behalf of the child, not the parent or the rest of the family.

READ:  Why Zymergen Stock Is Plunging 76% Today

Note that if that minor child has earned income, that child may also be eligible to contribute to a Traditional or Roth IRA, which would also be managed as a custodial account on the child’s behalf. For the sake of things like current income taxes, college financial aid planning,  and the child’s long-term financial benefit, it may be a good idea to get that child’s money inside a Roth IRA if possible.

Once that child reaches the age of majority, the custodian can begin the process of handing over control of the money to that now young adult. The age at which that transfer must be completed depends on state law but is typically somewhere between 18 and 25. 

Key things to think about when it comes to youth investing

On one hand, it can be awesome to help get your kids on the path to financial responsibility and independence early. Not only does starting early give them a leg up on the path to a decent nest egg, but it can also teach them important financial lessons while they’re still young enough to recover from any problems.

On the other hand, money brings with it other complications. For instance, if you expect your child will need financial aid to go to college, money in a custodial account is considered that child’s asset. Unless that money is inside a qualified retirement account like a Roth IRA, assets of the child are considered to be available to help pay for the cost of college.  That can reduce financial aid availability vs. what a package would have looked like if that money belonged to the parent.

READ:  Can Merck Beat Pfizer in This Multibillion-Dollar Vaccine Market?

In addition, much like winning the lottery, suddenly getting control of a decent chunk of money can cause problems for a young adult who isn’t quite ready for the responsibilities that brings with it. “Easy money” is easily spent, lost, or given away, and once it’s gone, it’s gone. As a result, it’s important to teach and coach good money management skills instead of just handing over the cash.

Also, investment income belonging to a child is subject to taxation. While the first $1,050 is untaxed, the next $1,050 is taxed at the child’s rate, and anything above that is taxed at the parent’s rate.  That can add filing complexity to a family’s tax tracking and reporting and is another thing to be aware of.

Get started to make it a reality

In the end, if investing early helps your child figure out how to be a good financial steward and helps him or her start of independent life without carrying a huge debt anchor, it can be worth it. The strong financial skills will serve your child well throughout a lifetime. And as a bonus, a single $1,000 investment at age 13 can potentially be worth over $170,000  by the time that child reaches retirement age. That’s an incredible start on a nest egg, and it’s made much easier by starting early.

READ:  7 Best Free Stock Trading Apps for September 2021

The reality is that you don’t need a lot of money to get started investing. Thanks to the power of compounding, in most cases the earlier you get started, the less you need to invest to reach the same net worth over time. That makes getting started as a teenager (or helping your teenager get started) a very powerful gift for the future.

So if you’d like to make it a reality to have or be a teenage investor, you certainly can. Just remember to get started soon, or else those teenage years will be left behind, and the opportunity will pass you by.


View more information: https://www.fool.com/investing/2021/08/15/can-you-really-start-investing-as-a-teenager/

Articles in category: investing

Leave a Reply

Back to top button