The best time to start investing is as early as possible. One of the reasons Warren Buffett is one of the wealthiest people on the planet is because he’s been investing since he was 11.
In his 2018 letter to Berkshire Hathaway shareholders, Buffett wrote:
The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.
Yes, it was possible to invest as a teen in 1942, and it’s still possible today. In fact, it’s become easier than ever. Here’s how to get started investing as a teen.
Figure out what kind of account to use
Minors aren’t allowed to open brokerage accounts themselves under state laws. Once there’s an account in their name, however, there’s nothing stopping them from executing trades themselves.
There are a few options for what type of brokerage account is best for a teenager.
Opening an IRA is an option. If you have earned income as a teenager, an adult can open an IRA in your name. Most teens would do well with a Roth IRA, specifically. With a Roth account, you pay taxes on your deposit, but you’ll never pay taxes on the growth in the account. Considering your tax liability is probably close to $0 as a teenager, you could end up having a big pile of money you’ll never have to pay taxes on when you retire.
Importantly, the IRS puts restrictions on access to your funds if you invest in an IRA. Since the accounts are meant for retirement, you won’t have full access to your funds until age 59 1/2. You can, however, pull out your initial contribution at any time, but that’s not recommended.
Another account that teenagers can use to invest is a UTMA or UGMA account. The Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) allows parents to open brokerage accounts as a custodian in their child’s name and gift them money to invest. Gifts are subject to gift tax limits, currently $15,000 per year per person (so a married couple could gift $30,000). Additionally, the custodian must authorize all transactions.
Dividend and capital gains in a UTMA/UGMA account are taxed at the child’s tax rate, but could be bumped up to the parent’s tax rate if their income exceeds the Kiddie Tax limits.
A new option on the market is the Fidelity Youth Account, designed for teenagers between 13 and 17 years old. Unlike a UTMA or UGMA account, the Youth Account isn’t a custodial account; the teen has independent control over every transaction. A parent is still required to help open the account, and can be notified of all transactions.
Start learning how to invest
Investing in the stock market can be as simple or complex as you want to make it.
You don’t have to buy stock in an individual company like Warren Buffett did in 1942.
You could buy a mutual fund or exchange-traded fund (ETF). And if you want the simplest way to invest, you can buy an index fund that tracks the entire U.S. stock market. In fact, that’s what Warren Buffett recommends for most investors. Unfortunately for him, (or maybe not so unfortunately considering his success) the first index fund didn’t come around until 1975.
Teens are often very familiar with hot growth companies from using their products on a day to day basis. Some may be interested in buying the stock of companies they know well and learning how their business works. It could be a great opportunity for teens to learn about investing in individual companies if one of their favorites is publicly traded.
There’s no one right way to invest your money. As long as you do your research and have a reason for why you’re buying a stock or fund, you’ll do well. After all, you’re already at a huge advantage starting your investing career as a teenager.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.