ROTH IRA for a Teenager

ROTH IRA for a Teenager

During the Annual Review Meetings held with my clients in the initial months of the year, I consistently found myself addressing similar inquiries from them. One topic that has sparked considerable interest among our clients is the idea of ROTH IRAs for teenagers. Recently, a client shared a real-life example that beautifully illustrates the potential benefits of this strategy. I hope that you find it interesting. 

The client recounted receiving their son’s 2023 W-2, revealing earnings of $3,000 from a summer job as a lifeguard. Intrigued by the possibility of securing his financial future, they explored the option of opening a ROTH IRA for their son. The good news? Their son’s income fell well below the ROTH IRA income phaseout levels for 2023, making him eligible to contribute to the account.

However, there’s a crucial point to note: the maximum ROTH IRA contribution cannot exceed the individual’s earned income. In this case, the son could contribute up to $3,000, the amount listed in Box 1 of his W-2. Whether the contribution comes from the teenager’s own earnings or is gifted by a family member is inconsequential to the IRS, as long as it doesn’t exceed the earned income.

ROTH IRA for Teenagers

Now, let’s talk about the power of compounding (or what Albert Einstein called “the 8th wonder of the world”). By making a ROTH IRA contribution and investing it wisely, our client’s son could potentially witness remarkable growth over time. With his 2023 contribution of $3,000, the son’s total ROTH IRA balance went up to an even $10,000. Having a long-term investment horizon, his ROTH IRA is invested in a low-cost equity index fund with a more aggressive approach. Without any additional contributions, this is what his ROTH IRA balance could look like 40 years from now:

  • $10,000 at 6% annual growth after 40 years = $102,857
  • $10,000 at 8% annual growth after 40 years = $217,245

Imagine the possibilities if additional contributions are made over the years. Even modest contributions during his teenage years could lead to significant wealth accumulation in the long run. 

Remember, it’s not about timing the market; it’s about time in the market. If you have the means, consider exploring the option of ROTH IRAs for your teenagers or grandchildren. The long-term benefits could indeed be astronomical.

If you have further questions or wish to discuss this topic in more detail, don’t hesitate to reach out. Your financial well-being is our priority. 

P.S. And, finally, it’s now April. That means the tax return filing deadline of April 15 is right around the corner. If you haven’t already filed your taxes – or requested an extension – be sure to do that soon!

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