Summer jobs are a common occurrence for teenagers looking to earn some extra cash during their break from school. However, what many parents and teenagers may not realize is that a summer job can also be an excellent opportunity to start saving for the future by opening a Roth IRA. According to experts, Roth IRAs offer a unique tax advantage for teenagers that can help them build a significant nest egg over time.
Certified financial planner, Carol Fabbri, explains that Roth IRAs are “triple-tax efficient” for teenagers. This means that the contributions made to a Roth IRA are funded with after-tax dollars, but teenagers often earn less than the standard deduction, which means they won’t owe taxes on the income used for contributions. Additionally, Roth IRAs offer tax-free growth on investments, and withdrawals in retirement are generally tax-free. These tax advantages can significantly benefit teenagers in the long run.
Fabbri gives 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. This highlights the power of long-term compound growth, where returns on investments accumulate over time. Experts emphasize that the sooner teenagers start saving and investing, the more they can benefit from this compounding effect.
A recent survey from Junior Achievement and MissionSquare revealed that more than 8 in 10 teenagers are already thinking about retirement. However, most mistakenly think that traditional savings accounts are the best long-term strategy. In reality, opening a Roth IRA can provide teenagers with greater financial benefits and tax advantages compared to simply saving money in a regular account.
If a child is considered a minor, parents can open a “custodial IRA,” which is a retirement account for a minor. The parent manages the account and investments until their child reaches the age of majority. While there is no age minimum for Roth IRA contributions, children must have “earned income” from a job to qualify. The IRA contribution limit for 2024 is $7,000, but children can’t deposit more than their earned income for the year. Contributions can be made until the tax deadline in 2025.
One of the benefits of Roth IRAs is their flexibility. The account owner can withdraw contributions at any time without taxes or penalties, and there are exceptions to the 10% penalty on earnings withdrawals before age 59½. This flexibility makes Roth IRAs an attractive option for teenagers looking to save for the future.
Certified financial planner Tammy Wener is a strong advocate for teenagers opening Roth IRAs with their summer income. She recommends parents consider providing a “match” to incentivize contributions. However, 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 penalties from the IRS.
Opening a Roth IRA for teenagers with summer jobs can be a smart financial move that sets them up for a secure future. The tax advantages, flexibility, and potential for long-term growth make Roth IRAs an attractive option for young savers. By starting early and taking advantage of the benefits offered by Roth IRAs, teenagers can build a solid foundation for their financial well-being in the years to come.
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