I met recently with the parent of a high school student who was thinking about ways her daughter could save for the future without jeopardizing any potential college financial aid.
That’s a concern other parents may have as well.
If your high school student works and earns money from a job, a Roth IRA is a great way to save. (To make contributions to a Roth, your student has to have earned income, e.g. income from a job or business).
Kids can open a Roth IRA even if they are under 18. Quick recap: unlike a Traditional IRA, there’s no income tax deduction when contributing money to a Roth, but on the flip side, no taxes will ever be due on the account growth assuming certain conditions are met. That’s an amazing tax break, which makes Roth IRAs the account of choice for most young people.
See our previous article #1 Best Way To Help The Kids or Grandkids? Get That Roth IRA Going
You can always withdraw your Roth contributions free of tax and penalties, so Roth IRAs are a great way for your budding entrepreneur to save for future expenses like college, buying a house, or building an emergency fund.
So, how about our high school student who wants to save money from her summer job without losing financial aid?
A Roth IRA is still a great choice. It’s classified as a retirement account, and won’t count against you on the FAFSA, the Free Application For Federal Student Aid, which is used to determine your student’s eligibility for student aid.
(Quick side note: distributions from Roth IRAs can be counted as income on the FAFSA, so tell your student it’s best not to withdraw Roth funds until the final college financial aid form has been submitted).
The bottom line: Saving and investing even small amounts when you are young can get you way ahead of the game. Plus, a Roth IRA is a fantastic way for your teenager to learn lifelong money habits that will come in handy once she starts on a career path and takes charge of her own finances.