How Does Micro-Investing Work? Pros, Cons & Tax Implications (2024)

Micro-investing is the process of setting aside small amounts of money to reach your savings goals. Some micro-investing methods include purchasing affordable fractional shares of stock, exchange-traded funds (ETFs), or investing spare change into your savings by using a micro-investing platform.

Simply put, micro-investing is oftentimes the first step toward reaching financial wellness for those who never thought it to be achievable.

With traditional investment vehicles, such as individual retirement accounts (IRAs), you typically need ample funds to open an account. For example, with Charles Schwab, depending on the investment account type you choose, you may need a minimum deposit of $5,000 to start an IRA. There are also rules and regulations for eligibility and withdrawal with traditional investing accounts.

This is not the case for micro-investing, which is an easy and accessible investment method that only takes an app to get started.

Pro-Tip

While most micro-investing apps do not require a minimum deposit, those that do typically only require $5 or less to start.

Did You Know?

Some companies, like Robinhood, offer a bonus equivalent to 10% to 100% of the value of your round-ups for a given week. For example, if you saved $7 in one week of round-ups and your bonus percentage is 50%, then you’d get a $3.50 bonus added to your investment.

Recurring transfers can be set up through most micro-investing apps, giving you the option to automatically send a set amount from your paycheck toward investments.

While saving pennies through the round-up feature builds over time, your savings will grow quicker by transferring a larger amount regularly.

However, everyone’s financial journey is different. You may not be at the crossroads to invest large amounts yet. What matters most in this case is sticking to your own pace and building healthy financial habits over time.

Some micro-investing apps, like Acorns, offer IRA and Roth IRA accounts. These investment vehicles are great options for those who don’t necessarily want to invest in stocks but want to build a steady saving for their future.

The percentage of return varies between each micro-investing app. It’s important to understand the differences between an IRA account and a Roth IRA account before committing to an investment.

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If you earn a certain amount through micro-investing, you may need to fill out additional forms during tax season. Keep in mind that some of these forms have different due dates than your regular taxable income. For example, form 1099-MISC is due on Jan. 31 of the following year.

Confirm your profits and losses through your micro-investing app before tax season. This can also help you determine which tax forms you need.

Tax Forms You May Need for Micro-Investing

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There are many benefits to micro-investing.

To start, it’s easy and accessible, making it a popular investment tool for young adults like millennials and Gen Z. Most apps are secure and safe, with fraud protection and all-digital card lock.

Plus, savings can start as small as spare change with micro-investing. Most apps understand that you may be new to investing and, in turn, will offer free educational videos to strengthen your financial knowledge.

Micro-investing also offers a low-market risk since the amounts invested are typically small.

While micro-investing is a simple first step to saving, it may not be sufficient in the long run to cover your retirement plan goals — a traditional investment account would be much more suitable for big savings.

For example, let’s say you are 40 years old and want to retire at 65. If you open a Roth IRA with a 7% return and contribute $170 each month, then your Roth IRA will have accumulated $138,060 by the time you turn 65.

Micro-investing is not likely to show the same results. The payoff is much less since you are putting in smaller amounts.

In addition, some micro-investing apps charge a monthly fee for their services. For example, Stash offers three plan options — $1, $3 or $9 per month. If you’re only using their app for the round-up service, then the fees may outweigh your profits depending on how much you save monthly.

It’s simple to start micro-investing. First, you should research a few micro-investing apps and find the one that fits your financial goals; then, download the app onto your phone, tablet or computer.

Create your account and answer any questions regarding your financial goals and investment strategies to personalize your experience. You will then need to link your debit or credit card to your account.

Several micro-investing apps offer their own debit cards with separate banking options. Most apps have different features to appease different users, so it’s important to compare monthly costs, promotional offers and overall app rating.

Best 3 Micro-Investing Apps

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