Simply Money

Simply Money

Each weeknight at 6pm, Simply Money makes money simple for you. Join hosts Amy Wagner and Steve Sprovach as they share easy-to-understand and...Full Bio


Does your teen have a summer job? This is the best savings tool

Every summer, teenagers around the Tri-State experience the rite of passage known as ‘working a summer job.’ And while all that extra cash can come in handy for gas money or buying the latest and greatest smartphone, we hope they’re saving some as well – and saving it in the right place.

Save in a Roth IRA

While your first inclination might be to suggest your child save his or her earnings in a savings account, at Simply Money Advisors, we have a different suggestion: a Roth IRA. This is for a very simple reason – tax-free growth!

With a Roth IRA, any money that’s contributed grows tax-free. Then, once you’re 59 ½ and have held the account for longer than five years, all that money comes out tax-free. You can take contributions out at any time. (Other eligibility requirements also apply)

Lock-in tax rates now

A Roth IRA does not give you an up-front tax break, but you’re getting tax-free growth in exchange. Plus, your teenager is probably going to be in low tax bracket (or potentially not have to pay taxes at all), so an up-front tax break isn’t really needed.

Instead, a Roth IRA allows your teen to “lock-in” their low tax rate now… and not have to pay taxes on that money again.

Watch out for contribution limits

The only caveat is how much your child can save: he or she can contribute as much as they made for the year, up to $5,500. For example, if your daughter makes $2,000 lifeguarding, she can contribute up to $2,000 for 2018.

Another note: if your teen is under the age of 18, you’ll have to set-up a custodial Roth IRA account. This means the account is in their name, but you actually control it until they become a legal adult.

The power of time

Want an example of the power of tax-free growth?

Let’s assume your 15-year-old will retire at age 65. He or she makes a one-time contribution of $2,000, giving that money 50 years to grow. At an average annual return of 7% after fees, that $2,000 would eventually turn into almost $59,000 – and not a penny has to go to Uncle Sam when it’s taken out.

Kick-in a ‘match’

And here’s an idea. As a parent, “match” what your teen contributes! If they make $1,000 this year and want to save $500 to their Roth IRA, kick-in another $500. Again, the total amount contributed for 2018 has to be either $5,500 or how much income they earned for the year, whichever is less.

The Simply Money Point

While your teenager might not be thinking long-term right now, try your best to help nudge them in the right direction by using a Roth IRA to save any earned income. It’s a fantastic, tax-advantaged way to get your child saving for the future.

And to help you learn more retirement planning, you’ll find free downloadable guides and online tutorials in our new “Retirement Resources” library.

Please remember that past performance may not be indicative of future  results.  Different types of investments involve varying degrees of  risk, and there can be no assurance that the future performance of any  specific investment, investment strategy, or product (including the  investments and/or investment strategies recommended or undertaken by  Simply Money Advisors), or any non-investment related content, made  reference to directly or indirectly will be profitable, equal any  corresponding indicated historical performance level(s), be suitable for  your portfolio or individual situation, or prove successful.  Due to  various factors, including changing market conditions and/or applicable  laws, this content may no longer be reflective of current opinions or  positions. Moreover, you should not assume that any discussion or  information contained here serves as the receipt of, or as a substitute  for, personalized investment advice from Simply Money Advisors. To the  extent that a reader has any questions regarding the applicability of  any specific issue discussed above to his/her individual situation,  he/she is encouraged to consult with the professional advisor of his/her  choosing. Simply Money Advisors is neither a law firm, a certified  public accounting firm, nor a tax advisory firm and no portion of the  blog content should be construed as legal, accounting, or tax advice.  Please consult your own attorney, accountant, and tax advisor for legal,  accounting, and tax advice. A copy of the Simply Money Advisors’  current written disclosure statement discussing our advisory services  and fees is available for review upon request. Advisory services offered  through Simply Money Advisors, a SEC registered investment adviser.  Insurance services are offered through Simply Money Insurance Agency, a  separate entity from Simply Money Advisors. Simply Money™ and the spiral  symbol are trademarks of Simply Money IP Holdings, LLC.