If you are a teenager in 2020, you may have heard of tax-free Roth Individual Retirement Accounts (IRAs), from your parents. But did you know that you too could open a Roth IRA?
Yes, anyone can open a Roth IRA provided they have an earned income. Be it babysitting or child modeling, if you have a paycheck, you can invest your earned income amount in your Roth IRA.
And the best part is, all that amount is tax-free! All of it!
The main advantage of investing in a Roth IRA as a teenager is that the money you invest and earn as you move up the tax bracket is all saved up safely for your future plans e.g education, travel, healthcare and so on.
This is why you should start retirement savings as early as 18 years or less, and Roth IRAs are a superb way to do it.
So what are some of the best Roth IRAs for teenagers? Let’s look at some facts before moving on.
What are Roth IRAs?
- Introduced under the Taxpayer Relief Act, 1997, it is named after Senator William Roth.
- Custodial Roth IRAs can be started for those under legal adult age.
- Roth IRA holder MUST have EARNED INCOME, and the deposit can only be the amount remaining after-tax reductions (but no tax on withdrawal)
- Investment can be in securities (stocks, bonds, mutual funds) or others (real estate, certificates of deposit, notes, derivatives, etc)
- Can be passed on to heirs if the account holder does not want to claim it at retirement
- Roth IRA’s minimum age for withdrawal of the complete amount (with both deposits and earnings) is 59 ½ years
- The deposits alone can be withdrawn if the Roth IRA has been functioning for at least 5 years, even if the holder is not 59 ½ years
- Presently, Roth IRA limits contributions at $6000 per annum for anyone under 50 years of age
Now let’s look at some of the best Roth IRA companies for teenagers. We are going to look at them in terms of how our contributions to our Roth IRA can be managed with the help of these brokerage companies.
- Custodial Roth IRA: Yes, and it is called Roth IRA for Kids
- Famous for: Mutual funds
Fidelity is ideal for a teenager, not only because it gives you the option of a custodial Roth IRA. Its account opening is easy, and incur no charges, and have no minimum requirements.
The company helps you find the best option for you to invest in, whether mutual funds, bonds, ETFs, stocks, etc.
When trading in stocks with your Roth IRA, there will be no brokerage fees owed to Fidelity. The mutual funds are brought to market by Fidelity with no expense ratio.
It also offers you thorough research and help, with 20 third-party providers for stock. The options strategy is given by the famed LiveVol and there are an additional 5 providers to do ETF research.
The bottomline is, your investment is safe with Fidelity.
02. Charles Schwab
- Custodial Roth IRA: Yes
- Famous for: Premium research and info for beginners to start investing
With Charles Schwab, you can invest in stocks, ETF trades, and options. For beginners, the company provides financial advice. It allows the more professional investors a more hands-on investment experience.
The only thing is, unlike Fidelity, there are minimum charges, and financial advice will incur more. The charges are all industry-standard, and you can trust in the advice that their expert team provides.
They throw all their support behind you in investing, which is why Charles Schwab Roth IRA is another great option for a teenager looking to secure their future.
- Custodial Roth IRA: Yes
- Famous for: Long-term fund investing without fees
Vanguard is perfect for the needs of a teenager’s Roth IRA because long term investments are lauded by Vanguard. While they do offer other trades, their platform is most suited for those who will hold their stocks for more than a year.
This company also seeks to educate its investors on trading fundamentals so that you can recognize the shifts in the stock market as you grow into a pro-investor.
They also offer many retirement planning tools that help you calculate how much you need to earn or invest to effectively secure your life.
The Vanguard Portfolio Watch is a unique tool through which the initial goals that you set up are constantly compared to the current state of your investment portfolio. This allows for adjustments in your investment, to make it risk-free.
For a teenager, all these features, plus the custodial Roth IRA offered by them, makes Vanguard a great option to choose as their future.
- Custodial Roth IRA: No
- Famous for: Investment managing
If you are above the legal age to open a Roth IRA and do not have the time to manage it yourself, Betterment is an excellent option to trust.
It is a robo-advisor that is programmed to find the best investment options for your portfolio, at a minimal cost.
As we said, there is a cost, and it depends on whether you choose Digital or Premium service.
In Betterment Digital, the fee is about 0.25% of your annual assets. For investing, Digital moves between a dozen or so exchange-traded funds.
Betterment Premium costs you about 0.4%, giving you unlimited access to a team of certified planners. For you to be eligible for that service, you must have $100,000 in your account.
For a teenager, therefore, the Digital option of Betterment Roth IRA will suit best. It gives you financial advice via an in-app messaging system.
05. TD Ameritrade
- Custodial Roth IRA: Yes
- Famous for: Being equally accessible to investors of all classes
TD Ameritrade is as good as any on this list and offers Roth IRA for minors. The investment choices it offers are vast, from fixed income products to commission-free ETFs and mutual funds without transaction fees.
For the beginner, the company offers tools for education in retirement options. It also provides tools like Retirement Calculator and IRA Selection tool, to help with the choices.
Third-party research by the likes of Market Edge and Morningstar Investment Management will provide sound financial advice if you choose TD Ameritrade Roth IRA.
Also, if you already have a 401k employer-sponsored pension plan, it can be converted or merged to Roth IRA at TD Ameritrade.
Frequently Asked Questions
1) How to open a Custodial Roth IRA with Fidelity?
Ans. It is quite easy. Just follow these steps:
Step 1. Go to www.fidelity.com
Step 2. Click on “Open a Roth IRA for Kids” seen on the page where you read about the benefits of a Roth IRA for kids.
Step 3. Give your details and confirm it on the next page.
Step 4. In the last step, you have the option to “Fund Your Account”.
Remember that you can fill the account with only as much amount as your child earns.
2) How does a Roth IRA work?
Ans. Think about a savings bank account, where you put your money in. Only, this money is deposited after the income tax on that amount is deducted. Then, the money put there can be invested in several types of investments: like stocks, bonds, mutual funds, etc.
The initial contribution will continue to grow, and no tax can be deducted from that growing money. This is how a Roth IRA works. And this is also why it is simply clever to start a Roth IRA with a brokerage company, like Fidelity.
As you may have guessed, we strongly recommend starting retirement savings as early as 18 or younger. And Roth IRAs are one of the best pension plans for teenagers.
But getting your teenager to save up the money that they earn might be easier said than done. They would want to spend it all, and who can blame them?
That is why it would be ideal if you offered to match their savings for the year.
A Roth IRA takes contributions up to $6000 in a year. If your kid makes that much or less, you can offer to invest that amount in their account, letting them spend or save their money like they want to.
There is nothing like the prospect of double money to get a teenager to work harder, as we are sure you would agree.
So, secure your kid’s future with a Roth IRA, and let them thank you years later when they realize the importance of this investment! Ciao!