Retirement is probably not on most teens' radars, but it should be. That’s because a relatively small investment today can grow into a substantial sum after decades of compounding. A great place to start is with a Roth IRA, which offers tax-free growth and tax-free withdrawals in retirement. Here are a few tips to get your teenager start𒁏ed on planning and saving for their future.

Tax-Free Growth and Income for Retirement

One of the biggest perks of a Roth IRA is the tax break it offers. With a Roth IRA, you don’t get an upfront 澳洲幸运5开奖号码历史查询:tax break as you do with a 澳洲幸运5开奖号码历史查询:traditional IRA. Instead, once your money has been inside the Roth IRA long enough and the account owner is old enough–two requirements that are easily met by the time a teenager is ready to take withdrawals in retirement–you can withdraw money tax-free. In the meantime, your contributions and earnings grow tax-free, and that goes on for as long as you live.

This usually 澳洲幸运5开奖号码历史查询:works out well for teens since most teens pay little, if any, income tax. If a teen has a summer job or wo🐬rks during the school year, their pay makes them eligibl♈e for a Roth. Here's how it works:

• Roth IRA contributions aren’t tax deductible, but when the teen gets older, they'll enter a higher tax bracket yet won't have to pay any taxes on their Roth IRA's investment earnings or withdrawals.
• Contributions can be withdrawn anytime, for any reason, without owing any taxes or penalties. However, the account holder will need to hold the account for a minimum of five years and wait until they are at least age 59½ to take out the earnings to avoid a 澳洲幸运5开奖号码历史查询:10% early withdrawal penalty.

You Need Earned Income to Fund a Roth IRA

Anyone can contribute to a Roth IRA, regardless of age, including babies, teenagers, and great-grandparents. Contributors just need to have 澳洲幸运5开奖号码历史查询:earned income the year they contribute.

How Much a Teen Can Contribute to a Roth IRA

A 澳洲幸运5开奖号码历史查询:Roth IRA contribution can only be as large as the contributor’s earned income. So, if your teen earned $4,000, that is the maximum amount they can contribute for that year.

Contributors can kick in an amount up to the annual Roth IRA 澳洲幸运5开奖号码历史查询:contribution limit–which is $7,000 for 2024 and 2025 ($8,000 for contributors who are age 50 or older), whichever is less.

Types of Earned Income That Qualify

Individuals earn income when they work for someone else who pays them, or when they own a business or farm. While babies are unlikely to have earned income unless they are child models or actors, the type of work teenagers often do—babysitting, lifeguarding, and barista-ing generally qualify. 澳洲幸运5开奖号码历史查询:Investment income does not qualify since it's considered 澳洲幸运5开奖号码历史查询:unearned income, and gifts do not qualify either.

A teenager's pay must be legitimate and at the going market rate. For instance, parents cannot pay their kids $1,000 an hour to mow the lawn and call it earned income. Ideally, the teen will receive a W-2 to substantiate their earnings. Otherwise, it’s a good idea to keep excellent reco🌠rds from odd jobsꦇ that do not provide tax records.

Adults Can Contribute to a Teen’s Roth IRA

The 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) does not care who contributes to the IRA. The teen just needs enough earned income to equal (or ജexc𓄧eed) the contribution.

In other words, 澳洲幸运5开奖号码历史查询:parents and other adults can match a teen’s earnings and contribute to the Roth. For example, if your teen earns $3,000 at a summer job, you can make a $3,000 contribution and let your child spend (or save) their money. Or, you could help by contributing a percentage of your teen's earnings—say, 50%.

How to Open a Roth IRA for a Teen

An adult must open a custodial Roth IRA account ⛄for a minor, which is typically age 18 in most states and 19 or 21 in others. These accounts are essentially the same as standard Roth IRAs, but the minimum investment amounts may be lower. Many brokers o𝓡ffer custodial Roth IRA accounts. Firms that currently offer accounts for minors include Charles Schwab, E*Trade, Fidelity, and Vanguard.

As the custodian, the adult controls the assets in the Roth IRA until the minor reaches the age of majority. At that point, the account belongs to the minor. A minor can continue to invest in a Roth IRA and set themselves up for a sound financial fu🎃ture—as far off as that future migh🌸t seem.

The Bottom Line

If everyone started a Roth IRA for their kids, there's a good chance more people would be financially prepared for retirement. For example, a single $7,000 contribution made at age 16 could grow to more than $552,000 over 50 years, assuming an 8% annual rate of return. By starting early, you help set your child up for financial success by establishing healthy saving habits and jumpstarting their nest egg.

Retirement Sꦫecurity Rule: What It Is and What It Means for Investors

At some point during the decades when you or your teenager-turned-adult nurtures their Roth IRA, you or they might seek investment guidance from a financial advisor. In that situation, you or your offspring should know about the 澳洲幸运5开奖号码历史查询:Retirement Security Rule. Also known as the fiduciary rule, the new regulation’s purpose is to protect investors from conflicts of interest when receiving 澳洲幸运5开奖号码历史查询:investment advice that the investor uses for retirement savings

The rule was issued by the 澳洲幸运5开奖号码历史查询:U.S. Department of Labor (DOL) on April 23, 2024. It takes effect on September 23, 2024. However, a one-year transition pe🎐riod will delay the effective date of certain 🐈conditions to 2025.

If an advisor is acting as a fiduciary under the Employee Retirement Income Security Act (ERISA), they are subject to the higher standard–the fiduciary best-advice standard rather than the lower, merely suitable advice standard. Their designation can🦩 limit ౠproducts and services they are allowed to sell to clients who are saving for retirement.