For many teenagers, summer means a chance to earn extra cash – but earning money also means he or she can open an individual retirement account (IRA).
Minors who have reached age 14 and have earned income are eligible to open a traditional or Roth IRA. Traditional IRAs allow contributions to grow tax deferred until retirement, and contributions may be tax-deductible. In contrast, contributions to Roth IRAs are always taxable, but withdrawals made after age 59½ can be tax free.
Early start makes a difference
When it comes to investing, an early start can make a big difference. As an example, let’s assume 16-year-old Angela earns $2,500 from her summer job at the mall. She or her parents can deposit $2,000 in a Roth IRA in Angela’s name. Suppose that money is left untouched for 50 years, until Angela retires at age 66, and the investment grows at a hypothetical rate of 10% each year. Angela could have more than $230,000 in her Roth IRA – money that could be distributed tax free.
Not interested? You can still help
Teens being teens, you may find that he or she would prefer to spend the money rather than invest it.
So, while you may want to encourage your teenage child or grandchild to invest some of his or her hard-earned money in an IRA instead of spending it—if the teen doesn’t want to contribute, you can fund an IRA contribution for him or her.
Doing so will give your teen an invaluable kick-start on life.