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**Summer Jobs for Teens: Why Investing in a Roth IRA is a Smart Move**
For high school and college students, summer jobs are an opportunity to get used to earning a paycheck. With that earned income, those young workers are also eligible to start investing in a Roth IRA.
Roth individual retirement accounts let workers set aside post-tax earnings towards retirement. In 2023, eligible workers may put up to $6,500 in a Roth IRA.
For young workers, opening a Roth IRA offers distinct advantages, experts say. "The greatest money-making asset any person can possess is time, and young people have more of it than anyone," said Ed Slott, an IRA expert and certified public accountant.
By starting to invest early, especially with the help of a parent or grandparent, they're more likely to continue that habit into their professional earning years, Slott said.
A "strong" summer job market for teens is expected this season, according to a forecast from Rhode Island College. That includes a projected 33.6% teen employment rate over the summer months, up from 32.7% in 2022.
Teen wages have also increased in recent years to real median weekly pay of $300 in 2022, a 7% bump from $280 in 2019, the research notes.
Roth IRAs offer a distinct advantage in retirement – the opportunity to take tax-free withdrawals, since the money invested was already taxed.
But Roth IRAs also offer other advantages, particularly the ability to take contributions out at any time before retirement, tax and penalty free. (Earnings may be withdrawn tax-free only after the account holder is age 59½, and it has been five years since the tax year of the first Roth IRA contribution.)
While teen workers are a long way from that age, getting started now is helpful because the five-year rule applies to the first contribution to any Roth IRA. It is a good idea to open a Roth IRA now to get the five-year rule going, Slott said.
If you contribute even a nominal amount to a Roth IRA in 2023, that will count as your first year of the five years, Slott said.
Importantly, the limit that may be contributed to a Roth IRA is up to $6,500 for 2023, but young workers who earn less can contribute only up to the amount they earn.
Eligibility to contribute to a Roth IRA also generally depends on how much you earn. Because workers may no longer qualify for Roth IRAs later in their careers when their incomes are higher, that also makes it advantageous to get started with these accounts early.
Of note, the earned income that qualifies for Roth contributions can be W-2 earnings or self-employment income. But money that comes from babysitting or mowing lawns, for example, must be reported to the IRS to qualify for Roth IRA contributions.
Generally, minors will need an adult to open and manage a Roth IRA on their behalf. The account is typically transferred to the child's name when they reach the age of majority, usually 18 or 21 depending on the state.
Having a parent, grandparent or other guardian involved can also help in other ways. Slott said he started his own daughter with a Roth IRA when she started working one summer. He let her spend the modest sum she earned, then contributed that same sum to a Roth IRA on her behalf.
The strategy had two benefits, Slott said. It established the Roth IRA for the future and helped show the value of earning and saving.
"They're more likely to continue it, especially if a parent or grandparent set it up for them, into their higher earning years," Slott said.
Adults who contribute money on behalf of a minor must be mindful that they should not exceed the earnings. So if a teen earns $4,000, for example, a parent or grandparent can only put in up to that sum.
However, if a teen earns more than $6,500, the maximum annual limit for 2023, contributions to the Roth IRA are capped at $6,500.
While Roth IRAs offer distinct advantages, opening a traditional savings account is also a popular route for teens looking to set aside money from their first jobs, Lannan said.
Those who open those accounts today have a distinct advantage with higher interest rates.
Many financial institutions also offer accounts specifically targeted at young savers and investors.
Early exposure to such accounts offers teens a way to start dabbling in investing and to learn by doing. For example, by purchasing fractional shares, which include just a portion of a stock, teens may gain experience with trading by investing just a few dollars.
**Conclusion: Embrace the Future - Encourage Teenagers to Invest in Roth IRAs**
The topic of summer jobs for teens has taken an interesting turn with the suggestion that investing in a Roth IRA is a smart move. While it may not be the first thing that comes to mind when thinking about young workers, the benefits are clear.
Starting to invest early in a Roth IRA allows teenagers to take advantage of their most valuable asset - time. By opening a Roth IRA, they can develop the habit of saving and investing from a young age, setting themselves up for a financially secure future.
The projected strong summer job market for teens and the increase in wages over the years make this an opportune time for young workers to consider opening a Roth IRA. Not only can they benefit from the potential tax-free withdrawals in retirement, but they also have the flexibility to withdraw contributions at any time without penalties.
It is essential for parents, grandparents, or guardians to support and guide teenagers in this financial endeavor. By involving adults, teenagers are more likely to continue the habit of investing into their higher-earning years.
However, it's worth noting that while Roth IRAs offer distinct advantages, traditional savings accounts with higher interest rates are also popular among teenagers. Financial institutions even offer specially tailored accounts for young savers and investors. These options provide a stepping stone for teenagers to learn about investing and gain experience in managing their finances.
Overall, encouraging teenagers to invest in Roth IRAs or explore other investment opportunities can provide them with valuable financial knowledge and a head start on building wealth for the future. Embracing this forward-thinking approach can set them up for long-term financial success.
Article First Published at: https://www.cnbc.com/2023/07/11/how-teens-can-make-the-most-of-summer-job-income-by-opening-a-roth-ira.html