Serious Investing for Teens (Ages 13-17)

• Investment policy statement: Teens with a job have earned income, so the policy statement can now cover a custodial Roth IRA alongside any 529 plan or custodial account. Common mistake: Applying a single risk level to every account the teen has, treating a custodial Roth IRA with a multi-decade horizon and a tuition fund needed within a few years as if they shared one purpose.
• Research sleeve: A teenager with earned income can fund a custodial Roth IRA, up to the lesser of earnings or the $7,500 IRA limit, so a sleeve held there has decades before any withdrawal rules matter. Common mistake: Using scarce Roth contribution room for short-term trading in individual names, when room left unused in a given year cannot be recovered and a teen's earned income may be small.
• Concentration management: Teenagers with a job can have a custodial Roth IRA, and the $7,500 IRA limit is capped by what the teen actually earned. Common mistake: Putting a first Roth IRA contribution entirely into one familiar company's stock, treating the account's tax-free label as if it protected against the loss itself.
• Tax location: A teen with earned income can open a custodial Roth IRA, with contributions limited to the smaller of $7,500 or the year's earnings. Common mistake: Funding a Roth IRA from allowance, gifts or investment income, or contributing more than the year's earnings, when only compensation from work counts toward the contribution.
• Rebalancing: For teens the rebalancing question splits by account. Common mistake: Rebalancing a custodial taxable account on the same schedule as the Roth IRA, which turns a tax-free adjustment in one account into a taxable sale in the other.
• Scenario testing: Teen portfolios are small, so the scenario that matters most is a change in income, not in prices: summer or part-time earnings fund Roth IRA contributions, which are limited to the lesser of earnings or $7,500. Common mistake: Concluding from one scenario run on a few hundred dollars that markets are safe or dangerous, when the balance is too small for the result to say much about real risk.
• Security research: A teen with a first job can hold researched positions in a custodial Roth IRA, funded up to the lesser of $7,500 or the year's earned income, which turns the research into a decades-long compounding question. Common mistake: Treating a viral ticker mention or an online personality's recommendation as the research itself, rather than as a lead that still has to be checked against the company's own filings and numbers.
• Exit rules: A teen's custodial Roth IRA, funded from earned income, carries a built-in exit rule: earnings generally need to stay until age 59 1/2 and a five-year period to come out tax-free. Common mistake: Treating a Roth IRA as a savings account and selling holdings to pull out earnings for a purchase, which can add tax and a 10% additional tax while permanently shrinking tax-free growth.

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