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How to Invest as a Teenager - Custodial Brokerage Accounts

You might think that there's no point in investing your money if you’re under, say, 25. The reality is, it's never too early to start preparing for your financial future. By investing even a small portion of your money in lower-risk assets, you’ll lay the foundation for financial stability, develop a useful habit, and ensure your money stays safe while growing.

As I discussed in this article, investing is beneficial for a number of reasons. Through proper research and dedication, anyone can develop a solid portfolio of investments. In this article, I’ll discuss how you can open a brokerage account to start investing even if you’re under the age of 18.

In order to invest if you’re under 18, you need to open a Custodial account. A Custodial account is an account in your name that is opened and co-managed by your parents. Once you reach a certain age (18 or 21, varies state to state), the account becomes solely in your name, meaning your parents no longer have control over it.

There are a few different kinds of Custodial accounts. If you’re under 18 and earning money (taxable income, like from a job at Starbucks), you can open a Custodial IRA. There are two different kinds of IRA’s, which I’ll discuss in-depth in a coming article. The first is a Traditional IRA, which is funded using pre-tax income, meaning once you withdraw your money, you’ll have to pay taxes on the withdrawn funds. The second one is called a Roth IRA. This account is funded using money that you have already paid taxes on, meaning your withdrawal will be tax-free.

If you’re under 18 and don’t earn taxable income, but you have an allowance or birthday money saved, or your parents are willing to give you money to invest with, you can open either a brokerage account under the Uniform Gift to Minors Act (UGMA) or under the Uniform Transfer to Minors Act (UTMA). A brokerage account is simply an investment account with a broker that you can use to buy and sell assets (bonds, stocks, etc).

Under UGMA, your parents can gift you financial assets such as stocks, bonds, or cash, all tax-free up to a certain amount. Under UTMA, your parents aren't restricted to just financial assets. They can give you any kind of asset, from real estate to art. In both cases, these assets are used to fund/supply your custodial brokerage account.

If your primary goal is to invest for college or some similar higher education, look into an Education Savings Account (also known as an Education IRA) or a 529 plan. While these are more restrictive, they can help in certain situations.

Under the ESA, as long as you're under 18, your parents can invest $2000 on your behalf every year from birth up until 18, for a total of $36,000 in deposits. Once you turn 18, you can withdraw the money and use it for textbooks, classes, and other costs associated with your education. However, you can no longer add any money to this account once you turn 18.

Similarly, under a 529 plan, your parents can deposit money on your behalf, but this account type has a much higher contribution limit. You can withdraw money from this account tax-free as long as it's used for education. In both accounts, you can invest in different assets. The main limitation of these accounts is that they both become irrelevant once you graduate college/higher education.

When it comes to deciding which kind of account to open, there's no one right answer. Take a look at your situation and see what account fits your needs best. If you're working, look into an IRA. If your account will be funded mostly by your parents, look into UTMA or UGMA. If your goal is to save for college, look at an ESA or 529 plan. Both IRA’s, UTMA, and UGMA accounts will be in your name once you are old enough, so you’ll control them entirely starting at 18/21.

Now that you know the different types of accounts, let's discuss how to open one. First, find a good brokerage. If your parents are familiar with investing and have a brokerage account, check if their brokerage offers custodial accounts. If it doesn’t, here are a few good brokerages that do.

Make sure to review the conditions for each brokerage, as factors like commission, minimum investment amount, and accessible assets may vary from account to account.

Once you’ve selected an account and a brokerage, all you’ll need is a parent to fill out any forms regarding income, bank statements, identification, etc. Once you’ve created your account, simply add some funds, select some investments, and purchase your first asset!

Congratulations, you're now one step closer to financial security and independence!

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Michael Maregne
Michael Maregne
Feb 21, 2021

Incredibly helpful and informative. You went to the full extent of explaining the small details involved in opening an account depending on the person's current situation, making it easy to follow for those who have little to no knowledge about investing. I appreciate the straightforward approach this article takes, as it was able to help me start my investing journey.

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