As a teen, investing your hard-earned money is probably the last thing that comes to mind, but it may be more important than you think. “Investing as soon as you can, especially as a teen, sets you up best for the future because the earlier you start the more rewarding it will be when you're older,” said George Kolovos, an accounting student. Even small amounts of money can be significant after being left to grow over years, and while there are a variety of different accounts that are available for teens to invest in, the Roth IRA in particular has a number of benefits. “If you invest $6,000 once at the age of 15 in a Roth IRA account, after 60 years at an 8% annual rate of return it could become over 281,000 dollars” (Daugherty, 2021).
The primary benefit of a Roth IRA is that you pay taxes on it immediately after your investment, which is unique compared to other accounts. Teens are likely in lower tax brackets now than they will be when they are adults. After paying the initial tax, their money grows in a Roth IRA tax-free, and they won't have to pay additional taxes after withdrawing it. The flexibility of Roth IRAs is also notable, “with a traditional IRA, you are required to start taking withdrawals at age 70 1⁄2. But with a Roth IRA, you can leave your money invested for as long as you want” (Ramirez, 2022)
Roth IRAs allow investors to choose what they want to invest in, including bonds, real estate, stocks, etc. While flexibility is often nice, this can leave young investors confused. Despite the variety of options, my professional sources noted that stocks are often the best choice. “Since teens have such a long time to invest, equities have historically outperformed other types of investment,” said portfolio manager Joseph Drodz. “Buying stock is a great opportunity for teens to invest in growth companies or equities of companies that they believe are going to do well”
When you are young, investing can help set you up for success. Due to its tax benefits and flexibility, investing in stocks through a Roth IRA can be very beneficial.
List of sources and interviewees:
https://www.investopedia.com/can-teenagers-invest-in-roth-iras-4770663
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
George Kolovos, Baylor University accounting student
Joseph Drodz, portfolio manager