Like a lot of people, I got my first “real job” (meaning one that wasn’t working for my parents’ small businesses for a little cash now and then) when I was 16. I worked for a local discount bookstore, and while some of the money I earned from this and later high school jobs helped me cover some car ownership costs, I spent most of what I earned on typical teenage expenses. I really wish I’d invested some of that cash, however.
If you’ve got a teenage child who has a summer job this year, you’re probably hoping they’ll save some of that money for the future, too. And luckily, you can open a custodial Roth IRA for them to help them get started with investing now.
Got earned income? You can fund a Roth IRA
An IRA (also known as an individual retirement account) is a tax-advantaged investment account you can open on your own, through any brokerage that offers them (most of the best brokers do). A traditional IRA is funded with pre-tax dollars, so it reduces your taxable income now (you pay taxes on the withdrawals you make in retirement).
Read more: unlock best-in-class perks with one of these brokerage accounts
A Roth IRA is a bit different — it’s funded with post-tax dollars, but in exchange for giving up that upfront tax break, you get a tax break when you make withdrawals. You can also withdraw your contributions at any time, but must wait at least five years until after account opening and be 59 1/2 or older to withdraw any money you’ve earned on investments without penalty.
You must have earned income to fund an IRA of any kind, so your hardworking teen qualifies. And your teen is certainly in a lower tax bracket with their summer job than they will be later in life — so now is an especially great time to take advantage of a Roth IRA. If they’re under 18 (or 21, depending on your state), you’ll have to open the account for them and serve as custodian to manage it. The outlay of time to ensure the account is open, money is contributed, and investments are funded will surely be worth it to put your child on a path to future financial security.
How much could $500 grow over time?
Now that you know more about how Roth IRAs work, we can check out an example scenario. Let’s say your teen is feeling ambitious and wants to put $500 into a Roth IRA. If we assume there’s eight weeks of summer left (the months of July and August), that comes out to $62.50 per week. (That’s looking more manageable already, right?)
If your teen uses the money in their Roth IRA to invest in stocks, they could be looking at a 10% annual return over time — the average annual stock market return over the last 50 years. How much could that $500 grow into?
| Beginning investment | 5 years | 10 years | 20 years | 30 years |
|---|---|---|---|---|
| $500 | $805.26 | $1,296.87 | $3,363.75 | $8,724.70 |
Data source: Author’s calculations using Investor.gov calculator.
Leave $500 earning a 10% annual return in place over three decades, and it will grow more than 17 times over. Now imagine if your teen gets in the habit of saving and investing a portion of every paycheck they receive going forward — and not just this summer. That $500 could be just the beginning of a fruitful investing career, and represent the chance to enter adulthood with a useful habit (and investment account) already in place for the future.
The best time to plant a tree
As the saying goes, the best time to plant a tree was 20 years ago — but the second-best time is right now. Starting to invest as a teen can do great things for your kid, so consider giving them the opportunity with a Roth IRA.
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