Is your teenager thinking about retirement? Have you ever wondered how to teach your teen about investing? Whether it's your child or grandchild, a Roth IRA is a great way to start a teen's retirement savings and teach them about investing.
The Advantage of a Roth IRA
Why a Roth IRA? Teenagers are in a very low tax bracket, so a traditional IRA (where contributions are tax deductible) will be of little value. A Roth IRA does not offer a current tax deduction, but withdrawals in retirement are tax-free, there is no required minimum distribution at age 70½, and there are special provisions for early withdrawals if needed.
You can contribute 100% of your teen's W-2 income to a Roth IRA, up to $5,000 for 2012 or $5,500 for 2013. You can contribute up to $400 of "self-employed" income (such as what they earn from baby-sitting or lawn mowing) to be reported on Schedule C of their tax return; in addition, you'll avoid paying any FICA payroll tax on up to $400 of that income. So, you can even start a Roth IRA for a 12-year-old who does some baby-sitting or lawn mowing. For example, if your 15-year-old makes $1,200 working at a fast food joint or retail store, you can contribute up to $1,200 to a Roth IRA.
"A teen's Roth IRA is typically funded by a parent or grandparent." [Tweet This]
You can continue funding a child's or grandchild's Roth IRA into their early 20s, as they start their first job out of college. The ability to contribute to a Roth IRA is phased out for those who make over roughly $100,000 (which would likely only apply to professional athletes or rock stars). If you fund a Roth IRA from age 15 to age 30 or so, your teen can be well on their way to retirement.
Start Teaching Your Teen About Investing
The Roth IRA is a great way for your teen to learn about investments and see how the contributions make their Roth IRA account grow.
You can still open a Roth IRA for 2012 income. The deadline is the date you file their 2012 income tax return, prior to or on April 15, 2013.
Your teen may not thank you for many years, but isn't that typical?
About Bruce J. Berno, CFP® Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.