One of the prime opportunities for teenagers working summer jobs is to open a retirement account and start saving for the future, according to experts. Certified financial planner Carol Fabbri explains that Roth individual retirement accounts (IRAs) can be “triple-tax efficient” for teenagers. Roth IRAs are funded with after-tax dollars, and since teens often earn less than the standard deduction, they won’t owe taxes on the income used for contributions. Moreover, Roth IRAs provide tax-free growth on investments, and withdrawals in retirement are generally tax-free.
If a 15-year-old were to invest $500 this summer, they could potentially have almost $10,000 when they retire in 50 years, assuming a 6% growth rate. The experts emphasize the importance of long-term compound growth, as the sooner you start saving and investing, the more magnified your returns will be over time. Despite over 8 in 10 teenagers already thinking about retirement, many mistakenly believe that saving is the best long-term strategy.
For children considered minors, parents have the option to open a “custodial IRA,” which is a retirement account managed by the parent until the child reaches the age of majority. While there is no age minimum for Roth IRA contributions, children must have earned income to qualify. The IRA contribution limit for 2024 is $7,000, but children cannot deposit more than their earned income for the year. Contributions for 2024 IRAs can be made until the tax deadline in 2025.
Another advantage of Roth IRAs is their flexibility. Account owners can withdraw contributions at any time without incurring taxes or penalties, with certain exceptions to the 10% penalty on earnings withdrawals before the age of 59 and a half. Financial planner Tammy Wener highly recommends kids opening Roth IRAs with summer income. Wener’s own children each have a Roth IRA, and she provides a “match” to incentivize contributions. However, it’s crucial to note that the child’s Roth IRA contribution combined with the parent match should not exceed the child’s earned income for the year, to avoid the IRS penalty on excess contributions.
It is essential for teenagers working summer jobs to consider opening a retirement account, such as a Roth IRA, to start saving for their future. The benefits of tax efficiency, long-term compound growth, and flexibility make Roth IRAs an ideal choice for young savers. By taking advantage of the opportunity to save and invest early, teenagers can set themselves up for financial security and independence in their later years.