Your guide on how to invest as a teenager

Part of growing up is saving for future financial goals, like retirement, and a big part of that is a sound investment strategy. This strategy can include a wide range of options, including designated retirement accounts, brokerage accounts, robo-advisors, and more. But as a teen, are there ways you can start investing while you’re still under 18 years old?

Fortunately, the answer is yes! Even though you’re under 18, you have a good collection of investment options to get an early start on your savings and its growth. Here are some tips on how to invest as a teenager.

How to invest as a teenager: 5 ways you can get started

Learning how to invest as a teenager is a great way to learn the ins and outs of all the available investments on the market today. It also helps you create a strong financial platform to get a head start. You can build upon it as you get older and start earning more cash to invest. 

Here are some ideas for how to invest as a teenager or learn about investing concepts.

1. Put money in an interest-bearing bank account

Investing requires understanding how putting your money away and letting it sit can help you secure your financial future. Investing in the stock market doesn’t produce interest; it produces returns and sometimes, dividends. 

However, an interest-bearing account will help you learn about how returns on investments work through the annual percentage yield (APY) you’ll earn.

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Opening a checking account with an APY is a great way for beginners to learn about this return while still having easy access to your cash via a debit card. These accounts typically have only small APYs — around 0.06% — but seeing those monthly interest deposits helps you learn how saving instead of spending can lead to financial growth.

You can even watch as you earn interest on the interest you earned in a previous month, known as compounding interest.

One benefit to an interest-bearing checking account is the accessibility of your cash. You can withdraw money from your checking account whenever you need it.

You can also opt for a high-yield savings account (HYSAs). These accounts require a little more commitment to saving than a checking account, as you can only withdraw funds from them penalty-free six times per month. Afterward, your bank may charge you an excessive transaction fee, which can range from $3 to $25, for each withdrawal.

The benefit of opening an HYSA is its higher interest rate. As of May 2023, these accounts offer an average APY of 0.39%, but some go as high as 4.5%. Remember, though, this APY fluctuates with the federal reserve rate. So as interest rates nationwide rise and fall, an HYSA’s APY will also usually rise and fall..

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2. Sign up for a custodial account with a parent

Investing in stocks, bonds, exchange-traded funds (ETFs), and similar things on your own as a teenager is possible as soon as you’re at least 18 years old. However, until then, you can invest your money with your parents’ help through a custodial account.

A custodial account is a brokerage account your parent or guardian opens for you. Along with your parents, you choose what investments to make, and your parents finalize them, as you legally cannot complete these types of transactions.

Once you reach the specified age — typically 18 or 21 years old — the account becomes fully yours, and you’re able to invest without parental approval of your investment decisions.

With your parent's approval, you can invest in any of the securities the investment account allows. This may include individual stocks, mutual funds, ETFs, and more. Some may even offer crypto or real estate investment trusts (REITs) as an option.

If you’re still unsure what to invest in, you can also use a robotic advisor — commonly called a robo-advisor — instead of having a self-directed investment strategy. These types of accounts ask you questions about your personal finances and investment goals, then use an algorithm to help you choose what types of investment options are best for you.

One thing to remember when choosing a custodial account is to ensure you choose a trading account that allows you to invest in fractional shares. You may not have hundreds or thousands of dollars laying around to invest in full shares, so fractional shares can be one of the best investments for teenagers.

3. Consider a custodial Roth IRA

A Roth individual retirement account (Roth IRA) is a powerful tool that allows you to save and invest post-tax income and enjoy tax-free financial growth. There are rules about when and how you can make penalty-free withdrawals, but the great thing is you don’t pay taxes or penalties on your original contribution no matter when you withdraw. You only pay taxes and penalties when you make early, nonqualified withdrawals of the money you’ve earned from investment growth.

Some examples of qualified withdrawals include:

• Those made after you turn 59.5 years old if your Roth IRA has been opened at least five years.

• Those made to your beneficiary or estate after death.

• Those you use to buy your first-ever home (capped at $10,000 for life).

So let’s say you invest $1,000 into an IRA, earn $100 in interest, then withdraw the full $1,100 balance for an unqualified use. You will only pay income tax and penalties on the $100 in growth. This means you can make deposits and not worry if you need to withdraw some of your cash before retirement if something comes up, making it a flexible option for young people.

As with an investment account, you must be a legal adult to open a Roth IRA. However, some financial institutions offer custodial Roth IRAs to get people started at a young age as long as they have earned income. It works like a custodial brokerage account.

4. Understand the taxes associated with custodial accounts

Custodial accounts have interesting tax rules because they deal with someone who’s under 18 bringing in unearned income — income not earned through working. 

If your unearned income — or the gains received through your investments — is less than $1,150 for the tax year, the IRS will not tax it.

If your unearned income was between $1,150 and $2,300, then you pay income tax at your tax rate on the difference. For example, if your investment returns were $1,550, you’d pay 0% tax on the first $1,150, then your income tax rate on the remaining $400.

If your unearned income was over $2,300, your parents must file a Form 8615, and the IRS will tax any amount exceeding $2,300 at the parent’s marginal tax rate. So, if your unearned income is $2,500:

• The IRS wouldn’t tax the first $1,150.

• The IRS would tax the second $1,150 at your tax rate.

• The IRS would tax the remaining $200 at your parent’s tax rate.

5. Open a Certificate of Deposit

If you feel confident in your saving and budgeting strategy, you can also look into certificates of deposit (CDs). CDs are similar to an HYSA. They offer higher interest rates, but they require you to leave a set amount in the account for a fixed period to get the full interest payout. If you withdraw early, you will lose some of the interest you earned.

CD interest rates vary by how long you commit to leaving the money in the account. For example, as of May 2023, the average CD APYs are:

• One month: 0.24%

• Three months: 0.78%

• Six months: 1.03%

• One year: 1.54%

• Two years: 1.43%

• Three years: 1.34%

• Four years: 1.29%

• Five years: 1.37%

CDs may also have minimum deposit requirements to get the maximum return. Check with your financial institution for all the terms and conditions.

So what makes CDs great investments for teens? Your initial deposit is FDIC-insured, so you don’t risk losing money. That’s something the stock market cannot promise you.

Get your start and learn more with the Greenlight app

Investing as a teen (with the help of your parents) is all about starting slow and learning as much as you can along the way. The Greenlight app can guide you on this journey. Not only does it offer financial literacy tools to help you gain the knowledge to be a savvy investor, but it has the financial tools you’ll need along the way. These tools include a handy debit card, up to a 5%* Savings Reward, and even the ability to invest in fractional shares with your parent’s help.

With the Greenlight investing app, kids and parents work together to research stocks, watch educational videos, and invest in ETFs or fractional shares.

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*Greenlight + Invest families can earn monthly rewards of 1% per annum, Greenlight Core and Greenlight Select families can earn 2% per annum, Greenlight Max families can earn 3% per annum, and Greenlight Infinity families can earn 5% per annum on an average daily savings balance of up to $5,000 per family. Only Greenlight Max and Infinity families can earn 1% cash back on spending monthly. To qualify, the Primary Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.