Reframe the benefits of a Roth like this, and you might just get your teenʼs attention.


Babysitting, lawn mowing, serving sundaes: The options available for enterprising teens havenʼt improved all that much since my day. Conversely, the options for spending those meager earnings have increased a million-fold. While my adolescent world was confined to the local mall, the youth of today have almost limitless options via the worldwide web. What little money teens are able to save too often goes into the old-style savings account—which offers little potential for long-term compounding.

 

What I wish Iʼd known at 16
It wasnʼt until college, when a charismatic professor elegantly demonstrated the math, that I was convinced to open my first retirement account. I wish Iʼd learned the power of compound interest even earlier, though. My kids are growing up fast and will soon get summer jobs. When they do, Iʼll try my best to extol the virtues of compound interest because the earlier they take advantage, the more powerful the effects.


Roth IRAs can be an especially beneficial investment option for young people, who have so many decades to go before they retire, and so many more years for their money to potentially grow tax free.


If your child is under 18, youʼll need to co-sign on a custodial account, and your kid must actually be earning that money (so birthday checks and other gifts donʼt count). Unlike traditional IRAs, withdrawals from Roth IRAs are generally tax (and penalty) free. The IRA needs to be at least five-years-old and the distribution must be on account of four life events: Age 59½, death, disability or first time home purchase, up to $10,000.


With so many years ahead of them, their income tax rate in retirement is unpredictable at best— but quite likely to be higher than when they opened their account and invested those first few dollars.


Why teens have an edge
Many full-fledged adults are discouraged from opening or converting to a Roth because of the upfront tax bite (the price due at conversion for those later tax-free withdrawals). However, teenagers working a summer job have a major advantage: Their annual earnings will likely be so low that theyʼll neither owe taxes now nor later on their Roth accounts. (This assumes they donʼt receive unearned earnings over the year—that is, passive sources of income that you gain without having to work, like distributions from trusts or inheritance—any such earnings in excess of $2,100 per year will be subject to a “kiddie tax” at their parentʼs tax rates).


In Part 2, Iʼll propose four ways to help nudge your kids towards considering a Roth IRA.

 

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