Many teenagers are working summer jobs and it is the perfect time to introduce them to the concept of saving for retirement. Opening a Roth individual retirement account (IRA) can be a smart financial move for teenagers as it offers triple-tax efficiency and long-term benefits.
Certified financial planner Carol Fabbri suggests that Roth IRAs are ideal for teenagers due to their tax benefits. Since teens typically earn less than the standard deduction, the income used for contributions is not subject to taxes. Additionally, Roth IRAs provide tax-free growth on investments and tax-free withdrawals in retirement. For example, a 15-year-old who invests $500 this summer could potentially have almost $10,000 by the time they retire in 50 years with a 6% growth rate.
Experts emphasize the power of long-term compound growth, stating that the sooner teenagers start saving and investing, the more their money can grow over time. While most teenagers are aware of the importance of saving for retirement, they often mistakenly believe that traditional savings accounts are the best option for long-term financial planning.
Parents can open a custodial IRA for their minor children, managing the account and investments until the child reaches adulthood. While there is no minimum age for Roth IRA contributions, teenagers must have earned income from a job to qualify. The IRA contribution limit for 2024 is $7,000, but teenagers cannot deposit more than their total earned income for the year. Contributions for the 2024 tax year can be made until the tax deadline in 2025.
One of the advantages of Roth IRAs is their flexibility. Account owners can withdraw contributions at any time without penalties or taxes, with certain exceptions for earnings withdrawals before age 59½. Financial planner Tammy Wener recommends teenagers opening Roth IRAs with their summer income, providing a matching incentive for contributions from her own children. It is crucial to ensure that the child’s IRA contribution and parental match do not exceed the total earned income for the year to avoid IRS penalties.
Opening a retirement account such as a Roth IRA can be a valuable financial lesson for teenagers working summer jobs. By taking advantage of the tax benefits, long-term growth potential, and flexibility of Roth IRAs, teenagers can start building a secure financial future early on. Encouraging teenagers to save and invest for retirement can set them on the path to financial independence and stability in the future.