Teens earning money is a beautiful thing! Now’s the time to salt away some of those earnings to a ROTH IRA and they won’t have to share with Uncle Sam. No tax now, no tax later. It doesn’t get much more beautiful than that. 🙂
Michelle Morris, CFP®, EA
BRIO Financial Planning
Did your teen get a summer job at the movie theater or a fast food restaurant this year? He or she probably has a lot of ideas about what to do with their pay – one great idea they probably haven’t thought of is investing in a ROTH IRA.
TEN things to know about teenagers and ROTH IRAs:
- To contribute to a ROTH, you must have earned income.
- For 2016 the ROTH contribution limit is $5,500/year (for people under 50) OR the amount of earned income whichever is less. So, if your teen earned $2,000 in 2016, their maximum contribution is $2,000.
- If you make too much money, you cannot contribute to a ROTH, but it is unlikely your teen makes this kind of money.
- As long as your teen earned less than $6,300 in 2016 they have no income tax due on their earnings. (This is the tax free now part!)
- If they do not take withdrawals from their ROTH until they are 59½ the earnings are all tax free! (This is the tax free later part!)
- The contributions can be withdrawn at any time for any reason without tax or penalty. (But I don’t recommend it!)
- An adult will be listed on the account if the participant is a minor.
- A good low-cost IRA provider is Vanguard, Most of their funds have $3,000 minimums, but a few have $1,000 minimums.
- It doesn’t matter where the money actually comes from as long as the teen has earnings. So if the teen wants to contribute $500 and the parents want to match $500 that’s fine as long as the teen earned $1,000. Many families incentivize their teen with matching funds.
- The deadline to make a ROTH contribution for 2016 is 4/17/2017.
So how much money are we talking about? Of course past performance is no guarantee of future results! But if you had invested $5,500 in a ROTH IRA 40 years ago on August 31st, 1976, the first day the first index fund opened at Vanguard (the S&P 500) and reinvested dividends it would be worth $334,045 on 8/31/16.
Yes, I know that ROTH IRAs did not exist in 1976, but just pretend. 🙂