Learning how to start investing young—under 18, even—teaches investors invaluable skills early. It’s also one of the best ways to take advantage of time and compound interest. But since you have to be 18 years old to open a brokerage account, young investors require some assistance.
In the United States, you have to be at least 18 to open a bank or brokerage account. Fortunately, many institutions offer accounts to help young investors break into the financial world without taking too many risks.
Checking accounts aren’t exactly “investments,” to be fair. But earning income and learning to responsibly handle a debit card is a great introduction to personal finance. (And if watching your account balance rise doesn’t inspire fiscal responsibility, paying your first overdraft fee just might.)
Savings accounts help prepare youth for investing without the stress of researching asset classes and diversification and taxes. All you need to start saving money is a few bucks and a little time to earn interest. And because savings accounts generally come with stricter withdrawal rules, it’s harder to spend your cash.
After you have a checking and savings account, it’s time to start investing. But if you’re under 18, you’ll have to learn through a custodial account.
If you want to learn how to invest young, IRAs provide an excellent jumping-off place. Many IRAs limit your opportunities to a specific set of strategies or low-cost index funds and ETFs. While not nearly as exciting as stock trading, you won’t have to fuss with a bunch of research or diversify your own investments.
To get started, a parent or guardian will have to open a custodial IRA for you. You’ll also need to have at least one tax return under your own name, as you must have earned (read: taxable) income to contribute to an IRA.
You can choose between traditional and Roth IRAs, which have a few important differences regarding contributions and withdrawals. Whatever your decision, your parent or guardian will maintain control of your contributions, investments, and distributions until you reach your state’s age of majority. Then, you can transfer your assets to your own name.
As stated above, you have to be at least 18 to open a brokerage account in the U.S. But some firms offer custodial taxable brokerage accounts under the Uniform Gift to Minors (UGMA) or Uniform Transfer to Minors (UTMA) Acts.
UGMA and UTMA accounts let parents, guardians, and other adults make tax-advantaged gifts to minors. They also provide a way for parents to open brokerage accounts for young investors.
With custodial brokerage accounts, parents can monitor contributions, trades, and transactions. Meanwhile, teenagers can enjoy the freedom to make their own investment mistakes, practice trading stocks, and learn to diversify their portfolios. Then, when the minor reaches the age of majority, the account will pass into their name.
Investing as a teenager gives you a chance to navigate the markets in a safe environment. You’ll learn how to manage money, grow confident in your decision-making skills, and, very importantly, benefit from time and compound interest. But as a minor, you’ll need a guardian or custodian to set up your accounts.
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