Help Your Child Open a Roth IRA with His Summer Job Money

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The following post is by MPFJ staff writer, Melissa Batai. Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food. She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

Summer is upon us, which means that many high school and college students are picking up summer jobs.

Whether they’re working as lifeguards, camp counselors, or waiters at local restaurants, these students will likely find themselves more flush than they’ve been in several months.  (Of course, flush is a relative term here, but still, teens will have some money to spend.)

When I worked during the summers, I wasn’t too financially savvy.  I used the money to pay for my car and gas, and I had fun with friends.  Chances are that’s what most teens do. Some more financially savvy teens may be setting money aside to buy a car or to pay for part of their college education, which are both worthwhile goals.

But, what if you’re a parent of a teen and you suggest that they use some of their money to do something they’ve likely not thought of doing before–opening a Roth IRA?

How to Open a Roth IRA for Your Teen

If your teen has a source of earned income, she can open a Roth IRA account, with your help.  You’ll need to serve as the custodian of the account since she can’t open the account herself.  (The account will be hers alone when she is of age.)  You’ll just need proof of her income. 
Keep in mind that not every brokerage offers Roth IRAs for teens, but a few that do include Vanguard, Janus, Schwab, and T. Rowe Price.

Benefits of Setting Up a Roth IRA for a Teen

They’re likely already in the lowest tax bracket.  Because teens typically earn a low wage and can’t work that many hours, especially during the school year, they’re likely already in the lowest tax bracket.  That means they’ll pay very little in taxes on the money before they invest it.   When they pull it out at retirement, they won’t pay taxes on their withdrawals.

They can withdraw the money as a down payment on a house or for college.  To maximize the power of the Roth, it’s best to keep the money in the account and let it grow.  However, if they needed to, they could use their contributions for a down payment on a house or for college without tax or penalty. 

CNN Money warns though, “You and your child should know that earnings money taken out for qualified higher educational costs, while free of early withdrawal penalties, will be subject to income tax.”  In addition, the earnings money taken out from the Roth may be considered income, which could have an impact on your child’s financial aid award for the next year, so proceed with caution with this option. 

Having a Roth IRA will not affect their student aid eligibility.  Simply having a Roth IRA will not affect a student’s financial aid availability as it is not included when the school calculates how much the child can afford to contribute to his own education.

How to Convince Your Child This Is a Good Idea

Convincing your teen to part with her money to invest it for retirement that will be 50 years away is not easy.  However, there are some strategies you can use to convince her.

1.  Start when she’s a tween, offer her simulated interest.  To help your child understand compounding interest, when she’s perhaps 10 or 11, have her put some money in the bank.  If she leaves that money there for 1 year, you’ll match her dollar for dollar.  If she leaves the money there for 2 years, you’ll give her $2 for every $1 she contributes.  This will help her understand the power of compounding interest and delayed gratification.

2.  Give your child a set amount to add to the account, and you add the rest.  If your teen is making $3,000 this summer, have her contribute $500, and you contribute the rest that you would like to see her invest.  (Your teen’s account can be funded up to the amount she earns in a year or $5,500, whichever is less.)

3.  Match your child’s contributions.  If your child agrees to contribute $500, then match the amount she saves.
Convincing your teen to invest in a Roth IRA may be a hard sell, but it’s worth trying.  Your teen’s few thousand dollars invested today could grow to a few hundred thousand by the time he’s ready to retire.  Imagine teaching your child now how to save for his future. 
In addition to the initial monetary perk, you may also convince him to be a lifelong saver.  If he continues to contribute to his Roth throughout his lifetime, he could easily have over a million dollars in that one account by the time he retires. 

How about you all? Have you ever tried to open up a Roth IRA for your child or tried to convince them to start saving money at a young age?

Share your experiences by commenting below!

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  1. One of the biggest financial influences in my life was my dad convincing me to open a Roth IRA with my first job out of college. There were no big lessons on investing involved, but it got the ball rolling, got me involved, and eventually I started getting more interested and learned more on my own. I think starting even earlier if you can is a great idea.
    My recent post Optimizing My Work Commute: Challenging One of My Money Rules

    • Matt–That's great on your part and your dad's. I didn't know anything about Roth IRAs until I was much older. However, as soon as my son gets a job in a few years, I'm opening a Roth IRA for him. The advantages financially can't be beat.
      My recent post The Importance of Diversifying When Self-Employed

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