How to Invest Money Belonging to a Teenager
Investing money for a teenager can present some unique challenges. Some teens are ready to handle money much sooner than others, and some teens also have a much clearer idea of what they want to spend it on, such as college or a car. But accurately predicting when the money will be needed and for what can be difficult, especially for someone who is still trying to discover who he is and what he wants to do.
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Instructions
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Determine the investment objectives and time horizon of your teen. Talk with him about what he wants to do with the money and when he will need it. Assuming he has a sensible plan for using it, such as to pay for education expenses or to buy a reasonably priced car that he will genuinely need, then you can choose a selection of investments that will pay for his expenses when they come due.
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Choose the right type of account for your portfolio. This choice will depend upon your tax bracket, time horizon, investment experience and how the money will be used. If it is earmarked for education, then a 529 Plan or a Coverdell Educational Savings Account may be appropriate. If not, then you may need to use a taxable custodial account, such as a Uniform Transfers to Minors Account or Uniform Gifts to Minors Account that allows you to act as custodian.
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Allocate the money in the investment portfolio according to your teen's time horizon and investment objectives. For example, if the portfolio is worth $50,000 and your teen wants to use some of it to pay for college now and the rest to pay for a wedding and make a down payment on a house someday, then you could put $40,000 of the money into bonds, bond funds and other income-producing instruments to help pay for school. The remainder should then go into a selection of stocks or a growth mutual fund that will hopefully be enough to cover the other goals when it is needed.
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Explain to your teen exactly what you are doing with the money and why. Your teen needs to learn how to invest as well, so this is a good time to start teaching about this subject. He needs to be able to read and understand his monthly account statements and also start planning how he will use his money when he takes possession of it.
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Tips & Warnings
The 529 Plans are state-sponsored savings accounts for higher education that invest in the funds available within the plan and grow tax-free until withdrawal. Coverdell accounts are self-directed and also grow tax-free until the money is used to pay for school. The contribution limit for a Coverdell account is only $2,000 per year, whereas large sums of money may be contributed to 529 Plans in one year. However, withdrawals from either type of account become taxable if they are used for anything other than paying for qualified educational expenses. But Coverdell accounts can be used to pay for lower educational expenses as well, and may be a better choice for experienced investors who want to trade individual securities or create a portfolio of investments that cannot be found inside a 529 Plan.
No matter how much you try to educate your teen, he may have no intention of using the money the way you would like him to. If you feel like your teen is not going to be able to handle the money in the account when he comes of age, then you might need to create a living trust that can hold the money until he reaches an age that you as the grantor can specify.
References
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