Should Teenagers Invest in a Roth IRA?

A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. For most people, a Roth IRA is the best option for saving for retirement. But is it the right choice for teenagers?

There are many factors to consider when making this decision. Let’s take a closer look at the pros and cons of investing in a Roth IRA as a teenager.

Pros of Opening a Roth IRA for Teenagers

The biggest advantage of a Roth IRA for teenagers is the ability to let their money grow tax-free. This means that all investment gains will be tax-free when they are withdrawn in retirement. And, since most teenagers are in a low tax bracket, they will likely pay little or no taxes on their Roth IRA contributions.

Another major advantage of a Roth IRA is that it offers flexibility in retirement withdrawals. With a traditional IRA, you are required to start taking withdrawals at age 70 ½. But with a Roth IRA, you can leave your money invested for as long as you want. This allows your money to continue growing tax-free for many years and until you’re ready to take withdrawls.

Finally, a Roth IRA can be a great tool for estate planning. If you name your children as the beneficiaries of your Roth IRA, they will inherit the account tax-free. This can help them tremendously in their own retirement planning.

Cons of Opening a Roth IRA for Teenagers

There are a few potential drawbacks to opening a Roth IRA for teenagers. First, since they are likely still in school, they may not have much money to contribute. The contribution limit for a Roth IRA in tax year 2022 is $6,000 (or $7,000 if you’re over age 50), so it may be difficult for teenagers to max out their contributions.

Teenagers may also be more interested in having as much money in their hand as possible vs contributing to a Roth IRA.  This is especially true if they are working to pay for their own education or save up for a car. While it’s important to have short-term savings, it’s also important to think about your long-term future.

Can a teenager open an IRA?

A teenager can not setup a Roth IRA by themselves, a parent or other adult will need to set up the custodial account Roth IRA for the minor. There is no age limit to setup a Roth IRA however the child must have earned income. The IRS uses the term “earned income” to describe both taxable money and hourly pay, such as wages from a W-2 job or self-employment earnings like their summer job babysitting or dog walking.

What are the contribution limits of an IRA for a teenager?

The Roth IRA contribution limit is $6,000 in 2022 (or $7,000 if you are 50 or older), regardless of how much earned money a person has. If a kid makes $3,000 dog walking, he or she can put up to $3,000 into a Roth IRA.

What is the best IRA for a teenager?

The Roth IRA is a great option for teens since the money they are putting away for the future is still accessible in the case of an emergency while they are in school and is completely tax-free. This allows them to build up the habit of saving while also giving them the peace of mind that they have money set aside in case of an unexpected event.

A teen’s Roth IRA is an account that they can contribute to and can be withdrawn from at any time. All investment earnings may be taxed as income, fined with a 10% early distribution penalty, or both.

What is the youngest age to open an IRA?

A minor child who has earned income for the year can contribute to a Roth IRA. Roth IRAs may provide tax advantages, such as tax-free qualified withdrawals in retirement. The Roth IRA is controlled by the parent until the child reaches adulthood, at which time it is transferred to him or her.

How much can a minor put in an IRA?

If a minor’s earnings are less than the maximum allowed IRA contribution, no more money may be contributed to the account. For example, if a kid makes $1,000 in one year, only $1,000 will be permitted to be put in the account. There’s a yearly limit of $6,000 per kid for the 2022 tax year. There is no minimum to open an account.

Modest Contributions to Child’s Roth IRA Can Amount to Big Bucks by Retirement Age

By making Roth contributions for a few years during the teenage years your kid can potentially accumulate quite a bit of money by retirement age.

But realistically, most kids won’t be willing to contribute the $6,000 annual maximum even when they have enough earnings to do so.

Say the child contributes $2,500 at the end of each of the four years. Assuming a 5 percent return, the Roth account would be worth about $82,000 in 45 years. Assuming an 8 percent return, the account value jumps to a whopping $259,000. Wow!

You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your “kid” approaches retirement age.

If you would like to discuss earned income and IRS options for your child, click here to schedule a consultation.