How old do you have to be to invest in stocks?
Before you start calling up the stock brokers we've reviewed, be aware that there's one basic problem with being a teenage investor: You have to be at least 18 to start investing in stocks.
There are a lot of investing apps that look perfect for teenagers (hello, Robinhood, but you still need to reach 18 to participate. This restriction is a legal requirement specific to the investment industry, and there's no way around it. At least, not directly.
How can you get around this roadblock?
Sudarshan Sridharan is a North Carolina high school student who scored headlines back in 2016. He didn't become famous for winning a football championship or starring in the school play, but making $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. He made all of his gains within three years.
Here's what Sudarshan did: He invested in using a custodial account opened and maintained by his dad.
These accounts let you invest through an adult. When you are 18 or 21 years old (depending on your state's laws), the account will revert to your name. By then, you'll be all set to fly solo.
So let's talk about custodial accounts.
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How custodial accounts work
A parent or guardian opens a custodial account for you and then “gifts” funds into it. For 2021, up to $15,000 can be gifted into a custodial account.
Once the funds are in the account, you can begin investing the money. Of course, your parent or guardian will have to make the actual trades for you. They will retain management control over the account, and as a teenager, you aren't allowed to contact the account broker to execute your trades.
However, you can be part of the investment process. You can create a portfolio allocation and select asset classes and even specific investments.
Once you reach the legal age in your state, the account's ownership will convert to you. Usually, this age is 21 years old. With the experience that you hopefully gained through the custodial arrangement, you should fully manage the account going forward and can decide what to do with your existing portfolio and future investments.
The best custodial accounts
To start investing as a teen, you're going to need a custodial account. We've reviewed many services that offer custodial trading accounts. And we've found some pretty cool products.
Ally Invest Review
Options like Ally Invest are great if you also want to access various banking features under one roof, like a high-yield savings account. And TD Ameritrade and E*TRADE are two of our favorite online brokers that offer commission-free trading on stocks and ETFs. You can also explore other investments with these custodial accounts like mutual funds and bonds.
Learn to diversify your custodial account
Once you get a custodial taxable or IRA account, you need to decide what kind of investments to put in there.
There are many different types of investments you can choose from, from simple-to-understand equities to complicated derivatives. We think it's best to start simply.
1. Start with stocks
You don't have to be a rocket scientist to start investing in stocks. In fact, by researching stocks and selecting which ones to invest in, you'll learn a lot about how the stock market works. Overall, this process is incredibly valuable for teenage investors since you can learn more about how the market works and some important investing terms.
To start out, consider choosing a company that you enjoy and — most importantly — trust. It's fun to be able to say you own part of a stock like McDonald's and The Walt Disney Co. But these have historically been steady earners, too.
Consider investing in a few of the stocks on the Dividend Aristocrat list. There are names you'll recognize, such as Coca-Cola and Target. These are companies that have proven histories of increased dividend payouts. That means, on top of the gains you'll get when you eventually sell the stock, you'll also receive cash distributions on a quarterly or annual basis.
If the big corporations wig you out, you can also put your money into helping strengthen sustainable industries and supporting the littler guys. Read all about ethical and sustainable investing here.
2. Move on to low-cost mutual funds
Once you understand stock trading basics, you might want to consider investing in some low-cost mutual funds. Mutual funds are collections of individual stocks. Because there are several stocks in each mutual fund, you do not depend on just one company to earn gains. So you can spread your risk out, rather than putting all your eggs in one basket.
The best mutual funds for new investors include diverse stocks that give you broad exposure to different industries and markets. Many of the stock brokers we've discussed offer their own mutual funds, so you won't have to pay hefty commissions when you buy and sell these investments.
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 earn steady money from compound interest.
Now, the interest rates you'll find at your local bank branch won't be much to write home about. However, online-only banks offer rates that can be up to 20 times higher. That's because they don't have the overhead costs of maintaining brick-and-mortar locations.
4. Use a microsavings app
Finally, if you have your own checking account, you can link it with a microsavings app. With these services, you can save and invest the change from every purchase made with your debit card.
Say you buy a soda and a bag of chips every day after school for $2.68. You can set the microsavings app to round up to the nearest dollar, so 32 cents will automatically hit your investing account. Sure, that's a tiny amount of money, but when it's done 20 days a month, that turns into more than $6 per month. That can add up over time, and you can invest that money for bigger gains.
Acorns is a particularly good microsavings app for teens. There's no minimum amount required to start saving, and there are ways to save extra money. Your parents can set up an account for themselves and you for only $5 a month with an Acorns Family account.
Open Acorns Family Account
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Choose the right custodial IRA plan
Custodial traditional IRAs
If you're investing for the long game (and thanks to compound interest, this is an awesome time to start), you can get an individual retirement account set up. These are known as IRAs, and not many people know that you can get one of these when you're a teenager.
Compound interest is like a gift that keeps on giving. Over time, it lets your money snowball and accumulate. Let's say you contribute $5,500 per year to a traditional IRA at ages 15, 16, and 17. You'll have $16,500 in the account. Now let's say you make no further contributions for the rest of your life.
You could have $773,877 by age 67, the expected age of full retirement if the account has an average rate of return of 8% per year for the next 50 years.
The only requirement is that you earn income that you can contribute to the account. For 2018, a teenager can contribute up to $5,500 of their earnings each year to a traditional IRA.
The investment earnings in your IRA will accumulate on a tax-deferred basis. But there are some benefits before you reach retirement age. For example, you can make a penalty-free withdrawal to buy your first home.
Custodial Roth IRAs
You can also set up a custodial Roth IRA as a teenager. These work much the same as a traditional IRA. You can make annual contributions up to $5,500.
But there are differences between a traditional and Roth IRA. The first is that a Roth contribution is not tax-deductible. Perhaps the most significant difference is that the distributions from your account will be tax-free.
There's another big difference between the two plans, one that will be a significant benefit for teenagers. With a Roth IRA, after five years, you can withdraw your contributions at any time, free from both regular income tax and the 10% early withdrawal penalty. This is because you already paid a fee for them.
After you have fully withdrawn your contributions and begin withdrawing accumulated investment earnings, income tax and penalties will apply. This is referred to as Roth IRA ordering rules.
The Roth IRA lets you get the benefits of tax-deferred investment income and building a retirement plan, but funds can be withdrawn early if necessary. That will be especially important in a young person's life and might make a Roth IRA preferred over a traditional one.
Investment companies that offer traditional custodial IRAs usually offer custodial Roth IRAs as well.
Read more>> What Is a Roth IRA?
Custodial IRAs revert to the teenager upon reaching legal age
While the teenager is considered a minor, the IRA account is in the parent or guardian's name. But upon reaching age 18 or 21, account ownership converts to the teenager depending on where you live.
If you start your account at age 14, you'll have four years' investment experience by the time you're 18. You should be ready to take over the account and make all the investment decisions.
You'll likely also be more investment savvy than your peers, who probably have no investment experience at all. Plus, you'll have the benefit of a growing investment account to build on throughout life. It's one of the best starts you can have.
Unfortunately, robo advisors typically don't offer custodial IRAs. That's too bad because these robo-investing platforms could be the perfect IRA choice for teenagers, though not necessarily the best learning tool for investment purposes.
No matter, you can begin by opening a custodial IRA through one of the brokers above. When you reach legal age, you can transfer the account to a robo advisor if you want.
Consider taxes & fees
Your account will not be tax-exempt. But it will be taxed at your tax rate. This is usually a good thing since you'll probably have a much lower rate 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.”
Start sooner rather than later
If you want to be a teenage investor — and you absolutely should if you can — ask your parent or guardian to set up a custodial investment account. You'll have time to learn the investment ropes and build up a small portfolio. That will give you a head start when you reach adulthood, and if you find investing to be interesting, you can check out our full how-to invest guide for beginners and go pro.
Trust me. It will be better than getting a new car as a graduation present.
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