When I was growing up I worked a couple of summer jobs to make my teenage ends meet. That cash was spent buying gas for driving around (because driving around was cool), eating out costs (again, so cool!), and car parts (I modified my car with expensive after-market parts).
To earn this money I mowed yards, watched homes and pets while people were on vacation, and worked at the movie theater. The movie theater was the “long term” job that I worked for a couple of years. To this day I can’t stand going to the movies. (I’d much rather save that money and rent when the movie comes out on DVD.) And don’t even talk to me about movie theater popcorn!
In other words, I was your typical teenager with a limited understanding of the time value of money. The money that bought those cheeseburgers, tires and CDs could have been used much more effectively through investing.
I did end up saving some of my money, but I shudder to think of the thousands of dollars that went straight from my paycheck to retailers. Imagine that money in an investment account like a Roth IRA earning a decent return for all those years since I was a teen.
Can Teenagers Invest in a Roth IRA?
I know, I know. You’re thinking, he can’t be serious, can he? No teenager would ever want to invest their summer job money! Whether or not they want to is an entirely different issue, but here’s to hoping we can convince them today. If you’re a teen—or know a teen—please read on.
So, can teens invest in a Roth IRA? Absolutely!
Anyone with earned income can invest that earned income in a Roth IRA. That is the only eligibility requirement for Roth IRAs: earned income (and, of course, earning no more than $118,000 a year, in 2017—not likely to be a teen problem!).
If you can convince a teen to do put some earnings into a Roth, it should greatly benefit him or her in the long run. Let’s say the teen sets aside $2,000, earns a 7% annual return and doesn’t touch the account for 50 years. That $2,000 grows to $65,560 over 50 years! Contrast that to waiting 10 years to save that $2,000. The account would only grow to $32,622. See the difference? A hefty $32,938 in additional growth just by starting earlier. That’s money earned without having to do any additional work. Now, there’s a concept….
Can Teens Save 100% of Their Earned Income?
Teenagers are treated just like adults (they should be thrilled!) when it comes to Roth IRAs. To qualify they must have earned income just like everyone else. They can invest up to $5,500 of that income in the Roth IRA since they are under age 50. If they somehow exceed the standard Roth IRA income limits they won’t be able to contribute. But there’s one catch that can keep teens from investing all of their cash in a Roth IRA.
Roth IRA Contributions Must Come from Earned Income
If a teen works at the movie theater and earns $2,000 during the summer she can only invest up to $2,000 in the Roth IRA. If she earns $4,000, she can invest up to $4,000. Contributions must be paid for from earned income.
Well-meaning parents and grandparents must be careful not to over-contribute on the teen’s behalf. If Ryan earns $2,000 at his summer job and decides to invest all of it, Mom and Dad can’t invest an additional $3,000 in his name to max out the Roth account. That’s the only catch for teens looking to invest some or all of their earned income. If only more people started saving at a young age!