Kids Saving Money Article 4

Roth IRA for Teens

It would seem that the term “part-time job” was created with a teenager in mind. The jobs usually require minimum skills, offer few hours per week, and the general pay is not too great. Because the typical teenager does not need a lot of money, this arrangement can work out nicely. Instead of allowing your teenager to blow most of that money on fast food, MP3 downloads, and movie tickets, why not set aside some of it for the future?

A Roth IRA is a great investment vehicle with many benefits. The main requirement is that the teenager must have legitimate income in order to contribute to a Roth IRA. There are annual contribution limits, but the money can come from parents or grandparents.

The first benefit that catches most people’s attention is the tax-free nature of the withdrawals. If the teen waits until age 59 ½ (today’s rules), then all of the earnings can be withdrawn without paying tax. A typical example shows a teenager putting away $3,000 every year for the next 50 years earning, on average, 8% each year. This equates to over $1.7 million that can be taken out without paying any tax. But that is just the starting point.

The amounts that are contributed can be taken from the account freely and will not be subject to paying a tax or penalty. If your teen wants to use some of the contributions and the earnings to help with college costs, there is no penalty for that either. Although the IRS says that income tax will have to be paid on that money for college expense, the chance of a college-aged student being in a high tax bracket is very minimum.

One more bonus for the Roth IRA is the down payment for a new home. If the account has been established for a minimum of five years, the IRS will allow earnings to be withdrawn without charging any tax or penalty so long as the money is helping with the purchase of a first home. For this type of transaction, the IRS puts the maximum amount at a generous $10,000. That could really help a young college graduate towards getting into their first home.

So, if your teen is one of the many across the land that is flipping burgers, working at the local gym, or providing lawn services, consider where that money is going. It could be that the Roth IRA you help your child establish now is the turning point in their financial future.

This information is for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice or opinions on specific facts or matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the information in this article, it is recommended that a Doeren Mayhew representative be contacted. This article is property of Kids Saving Money.