Helping Parents Advise Underage Investors

By Ryan C. Fuhrmann | January 08, 2013 AAA
Helping Parents Advise Underage Investors

College students and recent graduates have plenty of things to worry about. Finding employment is a key concern, as is securing a financial future. Below are five key pieces of advice they should consider following.

SEE: A Beginner's Guide To Managing Your Money

Open a Brokerage Account and Buy Stocks
In a recent interview, billionaire investor Warren Buffett stated that he has been buying stocks his entire life and that stocks in general are one of the best asset classes to invest in. An important caveat is that investing in stocks could require a very long investment time horizon to see a good return, but this should be of little concern to teenagers, because they have one of the longest investing timeframes of any demographic out there. Stock returns are one of the highest-returning classes out of all investment options.

An adult will be needed to open an account for a teenager under the age of 18. These are known as custodial accounts, but can be transferred over outright when the teenager reaches adulthood. A custodial brokerage account is a great option to help a young person become familiar with investing. These accounts are taxable, but buying into some great companies and holding them for years on end will help minimize the payment of capital gains, which must be paid only when a stock is sold at gain. Holding on to it allows unrealized gains to build indefinitely.

SEE: What You Need To Know About Capital Gains And Taxes

Consider Tax-Advantaged Accounts
Again, a custodial brokerage account is likely going to be the most logical and straightforward option for a teenager to open, but those with jobs have the option of opening a individual retirement account, or IRA for short. The first stipulation to opening an IRA is the person must be employed. Part-time and hourly work does apply, which is what most teens are going to be focused on. In this case, opening an IRA allows the teen to put pre-tax dollars into a savings vehicle. These investments grow on a tax-deferred basis until retirement. The assets can be tucked away until required minimum distributions take hold around age 70, leaving teens with more than 50 years of growth before taxes need to be paid.

SEE: Tips On How To Use IRAs To Boost Retirement Savings

Consider a Roth IRA
Roth IRA accounts are also an option. In contrast to a traditional IRA, taxes are paid up front, but then the account is not required to pay taxes when the money is withdrawn. The main advantage here is that as a teen tax rates are likely to be extremely low, which stems from the fact that work is likely not full time. Current Roth IRA contribution limits are around $5,000 annually, which is still plenty for a teen. Another benefit is that required minimum distributions are not required, as they are with a traditional IRA.

Consider All Your Investing Options
There are many asset classes beyond stocks that teens might want to consider. Mutual funds can be invested solely in stocks, but let a professional manager take care of the individual security selection. The other more traditional asset class is bonds, which can also be managed for total return and boost growth beyond the minuscule yields that most bonds pay these days. Alternative assets can also boost growth potential, but teens need to be careful to pick among hedge funds, private equity, as well as derivatives to boost returns over the long haul.

SEE: How To Pick A Good Mutual Fund

Learn Your Own Investing
Do-it-yourself is a worthwhile endeavor that can save a young person thousands and even millions of dollars over his or her lifetime. Keeping costs low and finding investments that appreciate in value are extremely important factors in achieving financial independence. Some financial advisors charge too much for their services and diversify into too many investments. For these reasons, learning to be your own financial advisor makes sense.

The Bottom Line
Achieving financial independence is easier said than done. The majority of Americans save far too little and are caught in their 50s or 60s with inadequate savings for retirement. But there are others who have had a long-term plan and saved diligently through their working years while living below their means. Avoiding debt is another key component to being able to enjoy one's retirement with sufficient savings levels.

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