How Old Do I Have to Be to Invest?

How Old Do I Have to Be to Invest?

How parents can start investing for their teens

Parents can play a vital role in helping their teens to start investing. The best way they can do that is to encourage them during every step of the process. If you’re already an experienced investor, show them the ropes. If not, learn alongside them.

Guide them in discovering their investing identity, which might be quite different from your own. Your teen has decades of investing ahead of them, while you have a shorter remaining investing time horizon. They can afford to take on more risk, including investing in some individual stocks that pique their interest, even if it might be a bumpier road. Encourage them to find what interests them the most so that they’ll stick with investing when times get tough, which we all know eventually happens.

Help them set up their brokerage account, but don’t do it for them. You want them to take ownership and initiative so that they continue investing. Also, it wouldn’t hurt to get them started with a gift deposit in their brokerage account. You could even offer to match a portion of their future deposits for a few years, much like a 401(k) company match.

The role time plays in compounding gives teens an advantage, so parents should encourage their teens to get started as soon as possible. They might complain at first, but they’ll eventually thank you for helping to get them on the path toward financial freedom.

Opening an Investment Account for Teens

If your child is under 18 years old, the most effective way to start investing for or with them is to open a custodial account. With this type of account, an adult “custodian” opens an account and can save and invest money on behalf of the child. Then, when the child reaches adulthood—either 18 or 21, depending on the state—they’ll take full control of the account.

“Keep in mind, assets in a custodial account legally belong to the child—the account beneficiary,” Jessee said. “The parent or custodian is merely a placeholder until the child reaches legal adulthood. This means that if a parent puts money in a custodial account for a child, it is considered an irrevocable gift and cannot be taken back. In other words, that money now belongs to your child.”

There are two common types of custodial accounts: Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. The two are almost identical but vary in the types of assets they can hold. UGMA accounts can hold financial assets like stocks, bonds, mutual funds, and cash, while UTMA accounts can hold all of those same assets as well as physical assets like real estate.

Another type of custodial account is a custodial individual retirement account (IRA), which allows teens and their parents to start saving for retirement before they reach adulthood. Similar to a UGMA or UTMA account, an adult custodian opens the IRA on behalf of a minor. Then, the family can contribute up to the child’s earned income for the year or up to $6,000, whichever is less.

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What if I’m Not Old Enough to Start Investing?

Just because you have not reached the age of 18 yet (or older, for some states) does not mean you have to give up on investing altogether. In fact, there are ways in which you could get around this age restriction and begin your investment journey right now.

Let’s discuss two methods in which you can begin your investment journey today, even if you are not legally old enough to open a brokerage account.

Open a Custodial Account

In order to do this, you will need to enlist the help of your parents or legal guardian. There are two Acts that provide parents with the right to invest and save money in the name of their child. These are the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA).

With the help of these Acts, you can open a custodial account with your parents as joint holders and begin buying and selling stocks just like you would in a standard brokerage account. Your parents can contribute to this account, and there are no restrictions on the contributions being made.

Once you have attained the legal age required by your state to begin investing on your own, the control of the custodial account and all of its assets will be transferred over to you, and you can then begin investing in it as a legal adult.

Open a State-Sponsored Investment Account

You will need the help of your parents or legal guardian for this method as well. A state-sponsored investment account can be opened under the 529 Savings Plan.

While your parents will be required to open the account for you, they can appoint you as a beneficiary. As such, you will be able to use the funds in the account for all of your educational expenses.

Again, as we saw with accounts opened through the UTMA and UGMA Acts, you will be able to buy and sell stocks on a state-sponsored account much like you would in a standard brokerage account. However, you need to keep in mind that all of these accounts (UTMA and UGMA accounts and a state-sponsored investment account) have several limitations compared to a standard investment account.

Where to Start Investing

If you pass the age restriction placed on investing in your state, you must be wondering where to begin.

Your first course of action would be to find a suitable brokerage with whom you can create an account. For all the newbies out there, a brokerage account can be equated to a traditional bank account. You will carry out all of your transactions through this brokerage account, including buying and selling stocks, options, bonds, mutual funds, as well as exchange-traded funds.

What is Investing?

Investopedia defines investment as an act of committing capital and time to a business, project, real estate, etc. in a bid to make a profit. Simply put, it is ploughing in money in anticipation of future returns. Since investment involves two scarce and costlier inputs, namely time and money, it should be done judiciously, wisely and with utmost care.  

So, what is the right age when one can start investing? We set out to explore.

What can people do to start investing before they turn 18?

Plenty. What people probably think of first when it comes to investing for minors are custodial accounts. The Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts allow parents to save and invest in a child’s name. It works pretty much like a standard brokerage account. Anyone can contribute, and there are no contribution limits. You’re able to buy and sell investments, with the details of doing so depending on your broker. Then, when the minor is no longer considered a minor—which happens at either age 18 or 21, depending on the investor’s state of residence—they get full control of the account.

Another option is a 529 savings plan, which is a state-sponsored investment account designed for the financial goal of paying for college and other educational costs. An adult can open a 529 plan and assign a child as the beneficiary who will be able to use the funds to cover tuition, fees, room and board as well as other qualified costs for college or even private primary and secondary schools.

The account holder can buy and sell investments within the account, options of which are typically far more limited than within a standard brokerage account. Often, you’re likely to go with a target-date fund, aimed around the child’s projected first year of college. Bonus: You can score a nice tax break when the funds are used for qualified educational costs. Downside: If you use the money for anything else, you’ll get hit with a heavy penalty on top of taxes.

Kids who earn income can also contribute to a Roth IRA. They’ll still need a grown-up to open and manage the account legally. But they’ll get all the retirement-saving benefits afforded to account holders of all ages, i.e. tax-free growth and withdrawals in retirement. Plus, starting at such a young age means decades and decades of compounding interest. That’s a win-win.

One catch is that they can only contribute as much as they earn. So even though the maximum contribution limit for a Roth IRA in 2019 is $6,000, if a child (or anyone of any age, really) only earns, say, $1,000 for the year in babysitting money, they can only put $1,000 into their Roth.

Even with such minor limitations, starting to invest as soon as possible is a major accomplishment. So now that you understand all the legal age restrictions on investing, our advice is simple: No matter how young or old you are, the best time to start investing is right now. The sooner you get started, the more time you’re giving yourself to save and your money to grow—and that’s the best way to help ensure you’re able to achieve all your financial goals.

Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Conclusion

Any brokerage firm will generally require that someone be at least 18 years of age to open a brokerage account and buy stocks. Luckily, this doesn’t mean you can’t invest for the children in your life and make financial contributions to their future.

Using custodial accounts like an UGMA account from EarlyBird allows loved ones to collectively invest in a child’s future.

Download EarlyBird on the app store today to start investing in the kids you love.

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Investment Strategies for Kids

There are a few different options and investment strategies that work well for young adults who are just beginning their investing journey:

1. Investing in Stocks

One avenue to get started is to invest in individual stocks. Trading stocks can be a fun way for a child or teen to pick companies they like to invest in. Hopefully, going on to watch those companies grow and distribute dividend payments.

However, stock trading also has a decent amount of risk.

If you don’t have enough funds to build a diversified portfolio of stocks for your child, you may risk picking a couple of losing companies.

2. Investing in Index Funds or ETFs

My preferred method to invest, especially for beginners, is to invest in an index fund or exchange traded fund (ETF).

Index investing allows you to invest in hundreds or thousands of investments with just one purchase of one fund. You’re still investing in the stock market, but you are doing so more efficiently.

You could also diversify beyond just one fund by building a 3 fund portfolio using low-cost mutual funds, index funds, and exchange traded funds (ETFs).

3. Investing in Bonds

If you wanted to take a more conservative approach when investing with your kid, you could opt to invest in bonds.

Typically, this is not recommended for kids, since stock and equity tend to outperform bonds over the long run, and your child is likely investing for a longer period of time. However, if you have a low risk tolerance as an investor, it can be a good option.

4. Saving in a High Yield Savings Account

Last, you could opt to not invest at all, and simply open a high yield savings account for your child to teach them the value of saving money.

Open a Bank Account: CIT Bank is a top-notch high-yield savings account, and a great place to start earning interest on your money.

4 Traditional Brokerage Account Alternatives

Kids can’t open traditional brokerage accounts, but there are still plenty of ways to start investing for the kids in your life.

Custodial brokerage account

A custodial brokerage account is one of the best ways to invest for a child you care about.

There are two types of custodial brokerage accounts: UGMA (Uniform Gifts to Minors Act) accounts and UTMA (Uniform Transfers to Minors Act) accounts. The two are very similar; the main difference being in the types of assets they can hold. Both are perfectly suitable for most families.

Custodial brokerage accounts can hold many different types of assets, including stocks, bonds, mutual funds, index funds, insurance policies, annuities, and cash.

Any adult can open this type of account for a child. The adult that manages the account is the custodian. The ability for other loved ones to contribute will depend on the platform you’re using. With EarlyBird, once the account is open, all of the loved ones in a child’s life can easily contribute through the app. 

The money within a custodial account can be invested in stocks and other types of investments, so that it can grow throughout the child’s life.

No matter who manages the account and who contributes, the money in the account belongs to the child. Contributions to this type of account are irrevocable gifts, meaning parents and other adults can’t just take them back.

Once the child reaches adulthood, they take full control of the account and can use the money for any purpose.

If you’re looking for a custodial brokerage account to invest for your child, EarlyBird might be the right choice.

EarlyBird provides a simple way for loved ones to set up an UGMA account for a child. Then, everyone in the child’s life can collectively invest in their future by contributing to the account.

EarlyBird makes it easy to decide on your investment strategy. The company offers five ETF portfolio options that range from conservative to aggressive. The custodian can also choose to invest up to 5% of the child’s portfolio in values-based funds, investing in companies that support important causes.

Once the child reaches adulthood, the money will be there waiting for them, ready to help fund their goals and dreams.

529 plan

A 529 plan is a type of investment account intended to save for education expenses. These accounts come in two different forms. 

The first is a prepaid college plan where parents can lock in the price of college and pay in advance. The other is a college savings plan where parents can invest to grow funds for their child’s education.

529 plans come with tax advantages that make them attractive to families. The money in the account grows tax-free. And as long as you spend it on qualified education expenses, there are no taxes on your withdrawals.

The downside of 529 plans is that the money is intended for college-related costs. If your child wants to spend the money on anything that doesn’t qualify as an educational expense, they’ll pay taxes on the earnings, as well as a 10% penalty.

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Custodial IRA

Another option for investing for kids is to open a custodial individual retirement account (IRA). Families can invest in either a traditional IRA or Roth IRA as long as the child has earned income.

It might seem premature to start saving for retirement at such a young age, but ultimately it gives your child’s savings that much more time to grow and compound.

The downside of this type of account is that the money is intended for a very specific purpose. Your children will face many large expenses throughout their lives, and the money may be more useful before they reach their golden years.

Parent’s brokerage account

Parents also have the option of buying stocks for their kids in their own brokerage accounts.

In this case, the child doesn’t have any real ownership over that stock. You might have their future in mind when you buy it, but the stock isn’t in their name, and they have no legal claim to it when they reach adulthood.

The other downside of this route is that money earned in your brokerage account doesn’t come with the same tax advantages as UGMA and UTMA accounts, 529 plans, and custodial retirement accounts.

Other family members may also feel less comfortable contributing when the funds are in the parent’s name, rather than the child they want to give to. 

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