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?