11-Year-Old's Investment Dilemma: Roth IRA or UGMA? Suze Orman Weighs In

Hazel, an 11-year-old with a keen interest in investing, recently wrote to financial expert Suze Orman with a question about the best way to save for her future. Hazel earns $24 a month doing chores and plans to start babysitting soon, adding to her growing savings. She already has $4,000 in a savings account and wants to invest it wisely. Hazel's parents suggested opening a custodial Roth IRA, but she has other plans. "I don't want to open a custodial Roth IRA because I want to be able to use the money when I'm younger and invest in a house," Hazel wrote. Orman responded with some valuable advice tailored to Hazel's situation.

Orman applauded Hazel's foresight and ambition, and offered an alternative to the custodial Roth IRA: a Uniform Gifts to Minors Act (UGMA) account. Opening a UGMA account would allow Hazel, with her parents' help, to invest her earnings in stocks or exchange-traded funds (ETFs) through platforms like Fidelity or Schwab. The key advantage? Hazel would have access to the funds once she reaches adulthood, enabling her to use them for significant milestones like buying a house.

Orman also recommended that Hazel invest her $24 monthly income consistently, emphasizing the value of starting small but staying consistent. "I would open up a Uniform Gifts to Minors Act account," Orman stated. "Invest that $24 a month consistently. You're going to be amazed at how much money you're going to have when you're 18."

When it comes to investing, Hazel has a few options to consider. A Roth IRA offers tax-free growth and withdrawals for retirement, but the money is locked in until age 59½. A UGMA account, on the other hand, provides more flexibility, allowing Hazel to access the funds once she reaches adulthood. However, the income generated by a UGMA account is taxed at the child's rate, which could impact Hazel's ability to qualify for financial aid for college.

Ultimately, the choice between a Roth IRA and a UGMA account depends on Hazel's long-term goals and priorities. If she plans to save for retirement, a Roth IRA might be the better option. But if she wants to have access to the money for other purposes, like buying a house, a UGMA account could be more suitable.

In conclusion, Hazel's investment journey is just beginning, and she has a lot to look forward to. By starting small and investing consistently, she can build a solid financial foundation for her future. With the guidance of financial experts like Suze Orman, Hazel can make informed decisions about her investments and set herself up for success.