Real Client Advice: Your Teenager Got A Job? Here’s How To Start Them On The Road To Riches

Does your teenager have part-time or summer earnings? Here’s how to make a big tree grow from that little acorn.

We talked to one of our clients,  a busy mom with three kids, earlier this month. She told us her teenage daughter has a part-time job, and wanted tips on the best ways for her to save some of her earnings.

Here’s the advice we gave her:

The Roth wins, hands down. For most teenagers, nothing beats opening a Roth IRA account. For our clients, we like to open Custodial Roth IRAs for kids under 18. The parent serves as custodian for now, and the account transitions to the child’s control when they reach age 18 to 21. You should be able to open this account for free at most brokers, without any annual account fees.

See our article:“Traditional Or Roth IRA: Which Is Best?”

Look Ma. No taxes! All the money saved in a Roth IRA grows totally tax-free for life. That’s right. No taxes ever again, as long as you follow the withdrawal rules and Congress doesn’t change current law.

Thousands of investment choices. You have access to a huge range of investments, just like with any other type of investment account. That means you can pick from thousands of ETFs and mutual funds, including many super low-cost options with no transaction fees, and specialty funds like socially responsible or “green” investment alternatives that often resonate with young investors. Tip: stick with no-load or no-commission options and invest with an eye toward growth. After all, your child has a very long investment time horizon.

Start socking it away early. Your future money mogul can contribute up to 100% of his or her work earnings – not to exceed $5,500 – to the Roth IRA for 2017, and again for 2018, assuming they keep working. So if your daughter earned $2,500 from her 2017 summer job, she can contribute $2,500 to her Roth for 2017 and make that contribution up to April 2018 when she files her taxes. If she works again next year, she can make another contribution for 2018.

See our article:“Smart Gifts For New Grads”

Make a match. And by the way, if you want to help her out, you’re welcome to do so. Let’s say she already spent $1,000 of her $2,500 earnings on gas, car insurance, clothes, and going out with friends. You can chip in if you want to help her out. The money going into the Roth doesn’t have to be the money she actually earned. It just can’t exceed the amount she earned.

Plans changed? That’s OK. Need to take out those Roth contributions down the road, maybe for college bills? Not a problem. Contributions can always be withdrawn free of tax and penalty. There are, however, restrictions on withdrawing earnings.

Let the compounding begin. You’ll be absolutely astonished to learn how those annual Roth contributions can build into some pretty serious cash over time. If your child contributes $5,500 every year to a Roth starting at age 22, then bumps up annual contributions to $6,500 at age 50, when she becomes eligible for catch-up contributions, she’ll accumulate $1.5 million in tax-free money by age 65 (assuming a return of 7% per year).

If she starts earlier – in her teens – she’ll accumulate an even bigger nest egg, which will give her the freedom to make her own choices in life. That’s a pretty amazing legacy any parent should be proud to give their child.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!


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