Teenager got a job? Now they need a ROTH!

Hello!

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. 🙂

Best,

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:

1. To contribute to a ROTH, you must have earned income.
   
2. 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.
3. If you make too much money, you cannot contribute to a ROTH, but it is unlikely your teen makes this kind of money.
4. 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!)
   
5. 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!)
   
6. The contributions can be withdrawn at any time for any reason without tax or penalty. (But I don’t recommend it!)
7. An adult will be listed on the account if the participant is a minor.
8. A good low-cost IRA provider is Vanguard, Most of their funds have $3,000 minimums, but a few have $1,000 minimums.
9. 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.
10. The deadline to make a ROTH contribution for 2016 is 4/17/2017.