Many financial experts recommend that parents help their teenage children open a retirement account if they are working summer jobs. This can be an excellent way to start saving for the future and take advantage of the benefits that come with it. Opening a Roth individual retirement account (IRA) for teenagers can be especially advantageous due to its triple-tax efficiency, making it a smart financial move for young earners.
According to certified financial planner Carol Fabbri, Roth IRAs are funded with after-tax dollars, making them an attractive option for teenagers. Since teens often earn less than the standard deduction, they won’t owe taxes on the income used for contributions. In addition, Roth IRAs offer tax-free growth on investments, and withdrawals in retirement are generally tax-free. This triple-tax efficiency makes Roth IRAs a powerful tool for long-term savings and investment.
Fabbri also emphasized the power of long-term compound growth when it comes to saving and investing. She gave an example of how a 15-year-old who invests $500 this summer could have almost $10,000 when they retire in 50 years, assuming a 6% growth rate. Experts agree that the sooner teenagers start saving and investing, the more they can benefit from returns on their returns over time.
Despite the benefits of starting a retirement account early, a recent survey from Junior Achievement and MissionSquare found that most teenagers mistakenly believe that savings is the best long-term strategy. In reality, opening a retirement account like a Roth IRA can provide teenagers with a tax-efficient way to grow their wealth and secure their financial future.
For teenagers who are considered minors, parents can open a custodial IRA on their behalf. This type of retirement account allows parents to manage the account and investments until their child reaches the age of majority, typically 18 or 21, depending on the state. While there is no age minimum for Roth IRA contributions, children must have earned income from a job to qualify. The contribution limit for 2024 is $7,000, but children cannot deposit more than their earned income for the year.
One of the key advantages of Roth IRAs is their flexibility. Account owners can withdraw contributions at any time without taxes or penalties, with certain exceptions to the 10% penalty on earnings withdrawals before age 59 ½. Financial planner Tammy Wener recommends that kids open Roth IRAs with their summer income, and she provides a match to incentivize contributions from her own children. It’s important to note that the child’s Roth IRA contribution and parent match cannot exceed the child’s earned income for the year to avoid IRS penalties.
Opening a retirement account for teenagers with summer jobs can be a valuable way to teach them about financial responsibility and start building wealth for the future. Roth IRAs offer tax-efficient benefits and long-term growth potential that can set teenagers on the path to financial security. By taking advantage of the opportunities available to them, teenagers can make smart choices now that will pay off in the long run.
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