As a teenager, I always kept myself busy during the summers with a job. Living overseas I taught English, I was a lifeguard, I taught swim lessons, and I even worked at a McDonald’s in Japan and I would have to yell “irasshaimasu” when people walked through the door! It was a great way to get out of the house, socialize, and make some extra cash. But did I save any of that?! Pshhh! I was too busy blowing that on karaoke and cute clothes in Tokyo!
I wish as a teen someone would have taught me good money habits. You know, the whole saving and investing thing?! I didn’t even know what investing meant back then. Now, whenever I have the opportunity to talk to teens about the power of saving and investing, after the initial eye-rolls, I see that aha! moment in their eyes. And here is why I very often recommend a Roth IRA to stash their summer cash!
Future Benefits of a Roth IRA
As long as your teen has earned income, meaning they reported their earnings to the IRS, they are able to contribute to a Roth IRA. The greatest benefit they have when it comes to investing now is time. Take a 15-year old who invests $2,500 into a Roth at the beginning of every summer. By the time they go off to college, assuming a 6% annual return, their investment would be worth $11,025! If they left it in there until age 65, having only contributed those first 3 years, their Roth IRA would be worth $205,100. That is the power of investing!!
The other amazing benefit to Roth IRAs is that while your teen doesn’t receive a tax deduction for contributing, they really don’t need the tax deduction. And since they are putting in money that has already been taxed, their investment grows 100% tax-free! So when retirement does roll around (age 59 1/2 to be exact), that $205,100 sitting in there can come out without any worry about taxes.
Roth IRA – Not Just For Retirement
While the Roth IRA is technically a retirement account, it can be used on other things as well. As long as the account has been open for at least five years, a distribution can be made penalty-free and tax-free for a first-time home purchase up to $10,000 of earnings. Another benefit is that a Roth IRA can be used to pay for qualified education expenses without a penalty.
The benefits of a Roth IRA heavily outweigh the costs. For an easy summer job and the patience to let an investment grow over time, your teen can set themselves up for many future benefits. Currently the maximum you can contribute to a Roth in 2018 is $5,500, however, if your teen only earned $500 for the year, $500 is the most they can contribute. My kids are still too young for this but when the time comes, I will certainly encourage them to save and invest. I may even set up an incentive such as for every dollar they invest, I will match that investment in their Roth (as long as it doesn’t exceed their earned income) because I’m sure they’re still going to want to spend some of their earnings. And remember it’s never too late to start with your own summer job!