Could You Convince Your Teen to Open a Roth IRA?

by TTMK on July 11, 2013 · 8 comments

The following post is by staff writer Melissa Batai

If your teen has a summer job, he likely has plenty of things to do with his money.  If he’s responsible, maybe he’s putting some aside to buy a car or save for college.  If he’s more like a typical teenager, he’s probably spending the money as fast as he can make it, likely on food, movies, clothes, games–typical teenage pursuits.

One thing he may not have thought of doing with his money is investing in a Roth IRA.  I know as a teenager, investing for retirement was the farthest thought from my mind.  My parents wouldn’t have thought of it, either.

However, parents now are more financially savvy, so why not talk to your teenager about opening a Roth IRA?

How to Convince Your Child to Open a Roth IRA

Let’s face it, convincing your 15 or 16 year olds to part with their hard earned dollars to save for something 40 or 50 years down the road is a tough sell.  The ideal time to start convincing them that this is a smart idea is when they’re still young.

For instance, have them open a bank account when they are young, say 7 to 10, and let them watch how the interest works.  Or, if the interest rate is too low to make much of a difference, agree to contribute some of your money for every year that they keep the money in the bank.  Say, if they keep $100 in the bank, you’ll match them $10 or $20 per year.  They can watch their money grow.  Once they understand this lesson, as they get older, you can show them how much money they can make if they invest at a young age.

Or, if you need a more realistic plan, maybe you can match every dollar your child contributes to her Roth IRA.  If she contributes $500, you’ll contribute $500.  Then she doesn’t have to use all of her earnings to fund a retirement account.

Requirements Your Teen Must Meet

To open a Roth IRA, a teen must have a job that supplies her with a W-2.  If she is independently employed, say as a babysitter or as a gardener, she must keep careful records and file an income tax return.

As the parent, if you own your own business, you can also hire your teen.  Just keep careful documentation and remember to have her file her own tax return at the end of the year.

How Much Can Your Teen Contribute?

You teen can contribute up to the full amount he earns in a year or the current Roth IRA yearly cap of $5,500 for those under 50, whichever amount is lowest.

Where Can Your Teen Open a Roth IRA?

Unfortunately, not every brokerage firm allows teens to have Roth IRA accounts.  However, there are several that do.

Keep in mind that you will need to be the custodian until the child is of legal age for your state.  That also means that you or your child will not be able to withdraw the money until he or she is of legal age, so you’ll have to be committed once you put in the money.  (Though you should be before you open the account anyway.)

Will Your Teen’s College Aid Be Affected?

Just as your own retirement is not a factor in how much financial aid your child qualifies for, so too is it with your child’s retirement fund.  Simply put, a child’s Roth IRA has no bearing on his ability to qualify for financial aid.

My Question for You:

Would you try to convince your child to open a Roth IRA?  Do you think your child would agree?

Or, do you think it’s best to let your child decide when to save for retirement and how to spend his money?

{ 8 comments… read them below or add one }

AverageJoe July 11, 2013 at 7:18 am

My kids get so fired up about investing that I don’t have to convince them. They both wanted to open one once we talked about what it was. Good stuff. The financial aid question always gets people on this one!

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Edward Antrobus July 11, 2013 at 7:29 am

“You teen can contribute up to the full amount he earns in a year or the current Roth IRA yearly cap of $5,500 for those under 50, whichever amount is lowest.”

Unless the IRS changed this, this isn’t correct. Like most other things in the tax law, there is a sliding scale. If your income falls under a certain threshold, the contribution cap gets reduced. I opened my Roth in 2009 with $500 and only wound up earning $8000 total that year. When I filed my taxes, I had to pay a penalty for contributing over the cap.

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Melissa July 11, 2013 at 8:46 am

Edward–Thanks for bringing this up. People always talk about the cap as making too much to contribute. It’s interesting to hear there is a cap on contributions based on your income being low. I’ll have to look into this.

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Brent Pittman July 12, 2013 at 5:40 am

I haven’t heard about this either. 8,000 is lot of babysitting and lawns mowed!

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Matt Becker July 11, 2013 at 8:42 am

My son isn’t old enough yet, but I’ve talk about this with my 18 year old brother. He’s been mildly interested, but hasn’t taken the plunge yet. We’ll see if I can get to him.

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Kevin @ Growing Family Benefits July 11, 2013 at 10:58 am

I have four teenagers. The boys save every penny they make, and the girls do the polar opposite.

The best argument for the Roth IRA may be the college cost angle. Since the money is not counted on the FSAFA form, I would argue that the savings actually could affect financial aid. The alternative to saving into a Roth is saving in another account than would be included on the form, and could hinder your chances for aid.

Some families may find that their “expected family contribution” towards college costs is lowered by moving funds into a Roth. That could translate into very large tuition savings.

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Grayson @ Debt Roundup July 11, 2013 at 11:25 am

My parents tried to get me to open a Roth and I never did it. They even gave me some money to fund it. I only just opened one about a year ago, way behind the curve, but I will sell the idea to my son when he is of age.

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Brent Pittman July 12, 2013 at 5:42 am

I think it’s a good idea in theory, but most teens are saving for a car and heading to college at this time. How would you balance these goals?

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