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Retirement Savings Tips for Teens: How to Build a Million-Dollar IRA

Retirement Savings Tips for Teens: How to Build a Million-Dollar IRA

April 25, 2019

Teenagers have a lot on their minds these days. Getting summer jobs, buying their first car, social media stress, peer pressure, SAT scores, college credits, retirement. Wait—retirement? 

It’s safe to say that retirement is the last thing on a 16-year-old’s mind, but it may be one of the most important things they should be thinking about. And, if you tell a teen that you have a way to make them a millionaire, you might get their attention. With most teens, money talks, and investing while they’re young can set them on the path to success early with no worries about financial security in the future. 

As parents, one of the most important things we can do is to teach our children financial responsibility. If it makes it easier for your child, try thinking of it as an investment account rather than a retirement account. It’s crucial for their future to understand the importance of saving now. Every year that goes by is literally thousands of dollars lost.  

How does it work?

If your teen were to put $2,000 in a Roth IRA at seven percent interest and doesn’t touch it for 50 years, it will grow to $65,560. By waiting 10 years later to put the same $2,000 in a Roth, their account would be $32,622. That is a huge difference in earnings. Now, imagine how much they will earn by saving $2,000 (or more) every year they work. There could be seven figures in their future.  

What’s the catch?

Your teen has to earn the money, or at least earn the amount contributed to the Roth. The income contributed to their retirement account must be from a job that takes out taxes (not a babysitting or lawn mowing job.) It’s safe to assume your teen won’t want to contribute every dollar they make to retirement, but you can help. If your child makes $2,000 a year, but only wants to contribute $1,000, you can offer to match their contribution as an incentive to save.  Great advice from an article in Forbes, “Make it  a teaching moment: Explain the power of compounding. Put $1,000 into an IRA now, and in 40 years it will have grown to $15,000, assuming seven percent annual return.”  You can give them the mindset of saving, to establish a habit of saving that will stabilize their future for years to come. 

Why now?

So, why all the pressure to teach our teens to save and prepare for the future?  According to Bankrate, 21 percent of working Americans aren’t saving any money for retirement, let for alone emergencies or other financial goals. Even worse, many Millennials and Gen Xers aren’t saving any money at all. Where is the money going? Mindless spending such as eating out, expensive coffee or smoothies, and lottery tickets.

To counteract the mindless spending thought process, it’s important for us to teach our teens the lesson of saving for the future versus our world of instant gratification

Now is the best time. Teens typically earn lower wages and pay little, if any, income tax. When investments are made in Roth IRA, withdrawals in retirement years are tax free. Also, the taxes teens pay now on the front end will more than likely be much less than taxes would be when they retire. 

Tips for helping your child open a Roth IRA:

  • If your teen is under 18 (or 21 in some states) you need to open a custodial or guardian IRA.
  • Money put into the Roth IRA must be earned income from an employer.
  • The maximum annual contribution in 2019 is $6,000.
  • Your teen can withdraw money from their Roth, just not earnings, with no penalty. However, breaking into the Roth can destroy it, so don’t encourage it. 
  • Withdrawals of interest before age 59 ½ will be taxed and penalized.

The teenage years are stressful enough, but you can rest confident knowing you’ve given them the tools to help make a successful future for them for many years to come. Consult a trusted financial advisor to ensure proper set-up and guidelines set forth by the IRS. And, bring your teen along for this meet—which teaches them how to speak with professionals about their future.