Want to get rich? Start investing young. No, really — if you max out your Roth IRA from ages 15 to 20, then never invest another cent, at a historically average 10% stock market return, you’ll have over $2.7 million by the time you turn 65.
Don’t be intimidated by all the opaque financial lingo. You don’t need to become a personal finance wizard. You just need to understand a few basics, and consistently invest money every month to build wealth.
Overview of Account Types Ideal for Teenagers
Most types of financial accounts aren’t very relevant to teenagers. But you should know a few types of accounts in particular to get started as a young adult.
1. Taxable Brokerage Account
Your typical vanilla investing account is called a taxable brokerage account, where you invest money without any special tax breaks. They take less than five minutes to open online at good beginner investment brokers like Vanguard, TD Ameritrade, or Charles Schwab.
Once opened, you use these accounts to buy and sell socks, bonds, real estate investment trusts (REITs), exchange-traded funds (ETFs), commodities, and other publicly-traded assets. More on the best of these investments for teenagers shortly.
And no, you don’t need to pick and choose any of these investments yourself. Sign up with an investment brokerage that offers a free robo-advisor service, and they can choose and manage ideal investments for you.
2. Traditional and Roth IRAs
Investment brokerages also offer tax-sheltered individual retirement accounts (IRAs) in addition to normal taxable accounts.
These come in two flavors. Traditional IRAs let you deduct your contribution from your taxable income on this year’s tax return. In contrast, Roth IRAs don’t give you an immediate tax break, but the money grows and compounds tax-free, and you pay no taxes on withdrawals in retirement.
For teenagers, who don’t bring home high incomes — but who will be far wealthier in retirement — it makes far more sense to invest in a Roth IRA. Letting your investments grow tax-free for several decades will be worth far more than whatever modest tax break you might get today on the income most teenagers earn.
You open and invest in Roth IRAs exactly like you do with taxable investment accounts, using the same login at your investment brokerage.
3. Custodial Accounts (UGMA/UTMA)
If your parents or other family members opened a custodial account for you as a minor, you’ll typically gain access to it once you turn 18.
These too are investment accounts operated by a brokerage firm. Just like taxable accounts and IRAs, you can log in to view and manage your investments.
Just beware that these can impact your financial aid applications, and must be disclosed when filling out your FAFSA.
4. Coverdell Education Savings Account (ESA)
If you’re working throughout your teens specifically to set aside money for college, consider investing the money through an Coverdell education savings account (ESA).
These accounts work similarly to Roth IRAs, where you don’t get an immediate tax deduction, but the money grows tax-free and you pay no taxes when you withdraw it to pay for qualified education expenses such as tuition, fees, and books.
Again, you can open these with your investment brokerage.
5. High-Yield Savings Account
Sometimes you just need a place to park cash, knowing that you might need to pull it out within the next few months.
Rather than investing the money, and risking the short-term volatility of the stock market, put the money in a high-yield savings account. You can minimize losses from inflation without any risk because deposit accounts are guaranteed by the FDIC.
Alternatively, you can park money in your checking account, but don’t expect to earn any interest.
How to Start Investing Your Money as a Teenager
Teenagers have a massive advantage over everyone else when it comes to building wealth: time for the investments to compound.
Unless you’re investing for upcoming college tuition, you don’t need to worry about volatility in the stock market or your other investments. You have plenty of time before you need to pull money out of your investments for retirement or other long-term financial goals.
Which means you can invest aggressively for maximum returns. Let older people worry about every dip and stock market correction — for you, they just mean a chance to buy stocks “on sale.”
Here are the most common assets you might consider investing in.
1. Stocks
If you buy no other type of investment as a teenager, buy stocks.
Since its inception, the S&P 500 has yielded an average annual return of around 10%. You can have your brokerage account (ideally a Roth IRA) open in a few short minutes, and start investing in stocks with as little as $10.
Stocks also make it easy to diversify. With the click of a button, you can buy a mix of U.S. and international stocks, small and large companies, and stocks from industries ranging from health care to technology to banking and beyond.
And with ETFs and mutual funds, you can get that diversification by buying just one or two funds (more on these next).
2. Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) is a fund that owns many different stocks. Or, for that matter, many different bonds, or REITs, or precious metals, or commodities, or any combination of the above.
For example, you can buy shares in an ETF that mimics a stock market index like the S&P 500. These “index funds” own shares in all companies represented in that stock index, so one share of the fund gives you ownership of every company in the index.
When you open an account with a robo-advisor, they ask you a few questions to determine your ideal investment portfolio (called your asset allocation). Then they typically propose a series of ETFs, and if you approve their suggested portfolio, they automatically spread your money into those ETFs for maximum diversification and returns.
3. Mutual Funds
Like ETFs, mutual funds own many different stocks or other asset types.
But ETFs, as their name suggests, trade in real time on stock exchanges. Their share prices move up and down throughout the day based on what investors are willing to pay for them.
Mutual funds reset their value at the end of each day, and tend to be more actively managed by a fund manager than ETFs. That makes them more expensive as a general rule because the fund itself charges more each year.
As a teenager, stick with passively managed ETFs unless you have a compelling reason to buy a specific mutual fund.
4. Real Estate
You probably don’t have the time, money, or expertise as a teenager to invest directly in properties. Many older adults don’t either. But that doesn’t mean you can’t invest in real estate.
From real estate investment trusts (REITs) to real estate crowdfunding platforms and beyond, you have many ways to invest in real estate. With each one, you can add another stream of passive income. Try Fundrise and Groundfloor as great starting investment options that require only modest investments to participate.
Real estate comes with different advantages and disadvantages than stocks. In many ways they complement each others’ strengths and weaknesses perfectly, which is why I invest in both stocks and real estate for the long term.
5. Bonds
A mainstay of retirees’ portfolios for their stability, you don’t need bonds in your portfolio as a teenager.
In the 21st century, interest rates have remained perpetually low. Which makes bonds a low-return, low-risk investment appropriate for retirees but not young people who can stomach higher risks for higher returns.
6. Micro-Investing Apps
While not an investment in and of themselves, micro-investing apps offer an easy way to automate your savings and investments.
Each has its own unique spin, but most work like this: When you spend money, they round up the cost to the nearest dollar and invest the difference. So if you spend $12.50 on lunch out, they round up the cost to $13 and move $.50 into your savings or investment account.
Many of these platforms operate as robo-advisors, automatically investing the money in diverse ETFs for you. Try Acorns as an easy and reputable option.
Investing as a Teenager FAQs
Getted started with investing feels overwhelming. Fortunately, technology makes it easier than ever to start investing, and to automate your savings and investments.
How Old Must You Be to Start Investing?
To open your own brokerage account, you need to be 18. However you can open a custodial account with your parents, which transfers to you when you turn 18 or 21.
If you’re underage and want to start investing, open a custodial account with your parents, which you can log into and manage alongside them.
How Old Must You Be to Invest with a Roth IRA?
Likewise, you must be 18 to open your own Roth IRA, but underage teens can open a custodial Roth IRA with their parents.
Note that the IRS doesn’t let you contribute more to an IRA than the income you report on your tax return. If you earn $3,000 in reported income for the year, that’s the most you can contribute to your IRA. In tax year 2022, the IRS allows a maximum contribution of $6,000 for taxpayers under age 50.
What Tools Are Good for Teen Investors?
In a word: robo-advisors.
Yes, the more you learn about investing and personal finance, the more likely you are to build wealth. But you don’t need to understand P/E ratios or pick individual stocks at all to start investing — just start investing in a handful of diverse index funds.
Which is where robo-advisors come in handy. They pick the best investments for you, based on your age and risk tolerance, and then you can set up automated recurring transfers to your account. They’ll handle the rest. You can always change how you invest later, when and if you choose to learn more about investing and become more hands-on with your portfolio.
I like SoFi Invest, Ally Invest, and Charles Schwab as free robo-advisors anyone can use. SoFi Invest lets you get started with a minimum investment of only $5.
Also consider micro-investing apps to help you automate your savings. Try Acorns to combine micro-investing with a robo-advisor service.
Do Teen Investors Pay Taxes on Their Investments?
Technically, everyone owes taxes on their investment returns, at least those in taxable accounts. But in reality, you probably won’t pay much, if anything, in taxes on your returns as a teen.
Because most teens earn so little, they typically fall under the standard deduction and other tax adjustments for low earners. In fact, the majority of Americans don’t actually pay net federal income taxes. For example, in tax year 2020, 61% of Americans paid nothing in federal income taxes.
Even if you do end up owing a little money in taxes, you’ll still likely fall into a low income tax bracket.
Even better, returns on investments are considered capital gains rather than ordinary income. You’ll likely avoid taxes on investments you hold for a year or longer altogether because single people earning less than $41,675 in 2022 pay no taxes on long-term capital gains.
Why Should Teens Start Investing Now?
The longer your investments have to compound, the less money you have to contribute out of your own pocket. Your investment returns start snowballing, and you earn returns on your returns.
For instance, if you invest $75 per month starting at age 15, you’ll have over $1 million by age 65 at a historically average 10% stock market return. But if you wait until 35 to start investing, you’d have to invest around $550 per month to reach the same figure by age 65.
Final Word
The younger you start investing, the faster you can build wealth. That in turn helps you start building passive income streams to earn money while you sleep.
With enough passive income, you reach financial independence and working becomes optional, no matter your age. I know people who retired at 30 because they got a head start investing young. Today they travel the world, work on passion projects, volunteer, and run online businesses on their own schedule.
Catch a glimpse of how far ahead you can pull from the herd by checking out the average net worth by age. Then leave your peers in the rearview mirror, simply by starting to invest before the thought even crosses their mind.
