Ask many parents how their teenage children spend their free time, and you’ll often hear a combination of “phone,” “social media,” and “video games.” But some teens don’t just spend their after-hour school immersed in electronics. Rather, they work on a part-time basis.
Holding down a job is a great thing for teens. Not only does it give them real-world skills and go through that could help them become gainfully employed in adulthood, but it also gives them a paycheck. That’s money they can use for leisure, so they’re not constantly hitting up the Bank of Mom and Dad.
If you have a teen who’s working, you may be encouraging them to stick at least some of their earnings into a savings account. That way, they’ll have money on hand for a rainy day. But there’s another account you should try to unveil your teen to — and inspire them to fund.
It pays to contribute to a Roth IRA
Retirement is apt to be the last thing on any given teenager’s mind. In spite of this, if you have a teen who’s working, it pays to talk up the benefits of contributing money to a Roth IRA.
The good news is that anyone with earned income can fund a Roth IRA. That includes kids under age 18.
However, children of that age do need an adult to serve as a custodian for that account until they’re old enough to handle their own assets. That typically happens at age 18, though in some cases, the requirement may be 21. At that point, what happens is that a custodial IRA gets converted into a new account in your child’s name only.
Roth IRAs offer a couple of really neat tax benefits. First, investment gains in a Roth IRA are tax free. Withdrawals are also tax free, which is a nice thing in retirement, since many people find that money can get tight once they’re no longer working.
Plus, while a Roth IRA is technically designed to be a retirement account (hence the “individual retirement account” that IRA stands for), it can actually double as a college savings account for your child. So if you have a child who’s holding down a job at age 16 and they end up needing money for college at age 21, that’s another source to tap.
Funding a Roth IRA early on could go a long way
It’s not the easiest thing to talk a teen into socking money away for retirement. But here’s a good way to convince yours that it’s a smart advance.
The stock market, over the past 50 years, has had an average annual return of 10%, as measured by the performance of the S&P 500 index. So let’s say your child invests $5,000 in a Roth IRA at age 17 and leaves that money alone for 50 years. If it generates that same 10% return, that $5,000 will grow into about $587,000.
Meanwhile, many people retire with a lot less money saved than that. So let’s say your child earns $5,000 in the course of a year from an after-school job. Investing that $5,000 alone could technically serve as your child’s entire nest egg. (Of course, it’s a good idea to inspire your child to continue to save for the future, but a nest egg worth close to $600,000 is far from shabby.)
Your teen may be eager to spend their earnings on outings with friends or gadgets. But you can really set your child up for a financially safeguard future by encouraging them to stick their earnings into a Roth IRA instead.
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