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Starting early is important to take advantage of two powerful factors that can help you build wealth over time: compound interest and time.
By starting to invest early, you are able to benefit from compounding returns since you give your money more time to grow.
So, if you want to be financially savvy, starting as early as possible is ideal - especially since you’ll still have the safety net of your family!
Roth IRA
What is it: A retirement account where the investments are tax-advantaged (meaning you pay none to way less taxes on the profits!)
Contribution Limit: $6,000/year as of 2022. If you are over the age of 50, then you may be able to contribute an additional $1,000.
Contributions and Restrictions:
- Contributions cannot be deducted from taxes
- Untaxed withdrawals are permitted - but the funds do need to be used for certain retirement expenses to avoid tax payments.
- There are no required minimal distributions (RMDs)
- At a certain income level, you cannot contribute to a Roth IRA anymore
Opening a Roth IRA: Speak to your bank or credit union and fill out the paperwork.
Roth IRAs are designed to help more people invest to save money for retirement - not just the rich!
You can contribute to a Roth IRA as soon as you make money. Some parents even list allowance money as official income so their children can get the tax benefit!
So, if your teen gets a summer job you should consider opening a Roth IRA with your bank institution.
Educational 529 Plan
What is it: An investment account used to pay for college or general educational expenses. The account is also tax-advantaged!
Contributions and Restrictions:
- States may have different 529 plan regulations and costs
- No yearly limit, but many states limit total contributions ranging from $235k to $525k.
- The funds can be used for K-12 tuition, college tuition, sometimes educational summer programs and even graduate school.
- If you withdraw the funds for non-educational purposes, fees will incur.
Opening a 529 plan: Bought directly from a state, through a broker, or with the help of a financial counselor.
UTMA Custodial Account
What is it: A flexible investment account for people under 18 to buy stocks, crypto, ETFs and mutual funds. The funds can be used to pay for anything that benefits the minor, not just education expenses.
If you are looking for a classic investing experience, UTMA custodial accounts are the best option - they grant the minor the closest level of freedom as traditional, adult investing accounts.
Contributions and Restrictions:
- Anyone can gift the account up to $16,000/year in 2022 and $17,000/year in 2023 tax-free.
- The funds can be used for any expense that benefits the minor.
- A custodian (US citizen, visa or green card holder over the age of majority) must sponsor the account to support the minor.
Opening a UTMA Custodial Account: Through a broker or with the help of a financial counselor.
With more flexibility and features, an UTMA custodial account can be risky. So, it is important to learn about financial literacy and investing early on.
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