Why a Roth IRA Could Be Powerful for Working Teenagers

By Keith Blazek0 Comments
 
Ron Lieber makes a compelling case for encouraging teenagers to use the income from their summer jobs to fund a Roth IRA rather than waiting until they’re in their twenties to start saving in his New York Times article, Summer Job? Time to Start a Roth I.R.A.
 
In his hypothetical example, making a maximum contribution to a Roth IRA each year from age 19 to 67 would produce $330,000 more than if someone began contributing to the account at age 25 (assuming 5-percent annual growth.
 
“An increase of about a third of a million dollars ought to be enough to get any teenager’s attention,” Lieber writes.
 
The dramatic difference in wealth accumulation is simply a matter of compound interest + time.
 
In addition to the lesson of compound interest + time, a Roth IRA can also help teens practice good saving habits if they have a goal of contributing the maximum amount to their Roth account each year.
 
This case study about a young Equity Trust client illustrates the concept of getting your children thinking about retirement early.
 
Lieber also touches on the challenge of saving for college and how it relates to teens saving in a Roth IRA. However, he doesn’t discuss a powerful (and often overlooked) benefit of Roth IRAs.
 
The IRS allows funds from a Roth IRA to be distributed before age 59½, penalty free, for qualified higher education expenses (For more information, access our infographic: 5 Ways Roth IRAs Can Potentially Impact More than Retirement).
 
While any earnings distributed before age 59½ are taxable, this is hardly different than saving for college outside a tax-advantaged account. The difference is Roth IRA funds invested within the account have the potential to grow tax-free until they’re needed (for college or retirement). Plus, your contributions can be withdrawn from the account tax-free (for any reason), provided the account is at least five years old.
 
To put the college vs. retirement savings conundrum in context, Lieber closes his article with the following:

“Paying for college is enormously challenging, but that problem may end up paling in comparison to what will happen when millions of pension-less people who didn’t save enough in their workplace retirement accounts and I.R.A.s start running out of money. The earlier we start helping the youngest among us avoid that fate, the better.”

If you’re interested in a Roth IRA for yourself or a young person in your life, download our two free guides:
  • Roth Account Guide: Tax-Free Advantages of Roth Retirement Accounts
  • Versatility of the Roth IRA: 5 Ways to Potentially Impact More than Retirement infographic 
Click here to access both