Summertime in full swing often means summer jobs for many young people, especially high school and college-age students. Earned income can provide a terrific opportunity for young people to save, think about their future, and begin practicing financial independence.

High school and college students motivated to save and invest can utilize Roth IRA accounts to get the most out of their dollars. Compound interest in action is a pretty magical thing to behold, and the earlier you can earn compound interest working for you, the better! Compound interest, tax benefits, and learning lifelong financial lessons can make for an incredible summer job experience.

Here is why opening a Roth IRA account is an excellent option for those spending their summer working as a high school or college student. 

Tax-Free Benefits

We are big fans of Roth IRAs here at Human Investing. Because the money used to contribute is after-tax dollars, it grows tax free and is not taxed down the road when you take it out…..We love this!

The younger your child starts a Roth IRA account, the more time their tax-free dollar amount in the account has to grow.

Compound Interest Growth

Youth isn’t wasted on the young. In Beth Kobliner’s book Make Your Kid a Money Genius (Even If You're Not): A Parents' Guide for Kids 3 to 23, she uses the following example:  

“Let's say [your teen] puts $1,000 of his summer earnings into a Roth IRA for each of the four years from age 15 to age 18. If he stops and never puts in another penny, but lets the money grow, by age 65 he'll have about $107,000, if the money earns 7% a year. 

But if your kid waits until age 25 and then puts away $1,000 for each of the four years until age 28 and stops, that account will only be worth a little over $50,000 by age 65.”

By taking advantage of a Roth IRA early on (in this example, ages 15-18), you can double your money compared to starting in your twenties. 

Roth IRA Specifics

In 2022, the maximum annual Roth IRA contribution is $6,000 a person for those under 50 years old who are single and making under $129,000 a year.

For those under 18 years old:

For children under the age of 18, they would need to open a Minor or Custodial Roth IRA account. 

Money put in this account must be earned, not gifted (this includes birthday and graduation gifts), and the adult who opens this account for the minor controls the assets until the minor reaches the age of majority (which is 18). 

Adults can also contribute. If your teen earns $3,000 at their summer job, you could either contribute the full amount they earned and let them spend their money, or you could contribute a percentage of your teen’s earnings (like 50%). 

It’s important to note that parents can contribute the money to a teen’s Roth IRA if their teen earned at least that amount. For example, if your teen made $2000, the most that could be contributed to the Roth IRA is $2000 total.

More info here: https://www.schwab.com/ira/custodial-ira 

For those over 18 years old:

For children 18 years or older, their Roth IRA account is now no different than the Roth IRA their parents might have. This account has the same requirements and restrictions as any other non-minor Roth IRA.

Building habits for the long-term

Here are a few ideas from parents on our team about approaching this opportunity with your child who has a summer job. 

As tempting as it is to spend those paychecks on something more tangible (a car, clothes, trips with friends), our children will need to understand the importance of financial independence, hard work, and investing for the future. Old habits die hard, so the earlier they learn these lessons, the better off they will be in the long run! 

You can incentivize your child’s savings by matching their Roth IRA contribution (up to their contribution limit). You can also lead by example. Share with your child why you save and what your financial “why” is. Share your hopes and dreams for their financial future and how their Roth IRA can be a means to this end. 

If you want to read more about Roth IRAs, check out our other blog post by fellow HI team member Nicole: Is a Roth IRA the Right Account for you?

Feel free to reach out to our Human Investing team if you would like more information about Roth IRA accounts. 

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