Advertisement
retirement

How to Turn a Teen’s Summer Wages into Millions

You’re never too young to open a Roth IRA if you earn money from a job. If you invest in a Roth IRA early—and continually over decades—modest sums can grow into seven figures.

Question:

My 15-year-old son is doing landscaping this summer for neighbors, and it looks like he’ll earn about $1,500. Is there a minimum age to contribute to a Roth IRA, and must he have a W-2? If my son can open a Roth, would he be able to contribute up to the $5,500 annual limit?

Answer:

Advertisement - Article continues below

There’s no minimum age to be able to contribute to a Roth IRA. Your son just needs to have earned income from a job or self-employment (investing income doesn’t count). If he earns $1,500 from working this year, he’ll be able to contribute up to $1,500 to a Roth IRA. If he makes more than $5,500, he’ll be able to contribute only the 2018 maximum IRA limit of $5,500. And he doesn’t need to have income from a W-2 or 1099 to contribute.

Because he’s likely receiving money from a variety of neighbors, he should keep a log of how much he is paid and when. “Parents should help their child document the work done and compensation received and the dates to provide to the IRS if needed,” says Maura Cassidy, vice president of retirement for Fidelity. Keep copies of any checks he receives as payment. It also helps to track earnings on a spreadsheet or in a notebook that you keep with your tax files as proof that he earned income from a job.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

The maximum amount your son can contribute to a Roth for the year is based on his earnings, but he doesn’t need to make the contribution himself. You can give him the money to contribute, or you can match his contributions. Because he’s a minor, he’ll need a custodial Roth IRA, which can be opened and managed by an adult on his behalf. Fidelity, which has no minimum investment requirement, allows parents, grandparents, aunts, uncles or even family friends to open and manage an account for a minor. At the end of June, the average kid IRA balance at Fidelity was $3,801. Several brokerage firms and mutual fund companies also offer custodial Roth IRAs for kids, with no annual fees and low or no investing minimums. TD Ameritrade, for example, has no investing minimum, Schwab has a $100 investing minimum for custodial IRAs, and Vanguard lets minors open a mutual fund IRA with $1,000 or a brokerage IRA with no minimum.

Contributing to a Roth IRA can give a child a huge head start on future savings. He’ll be able to withdraw the contributions at any age and for any reason without taxes or penalties, and he can withdraw the earnings tax-free after age 59½. A 15-year-old who contributes $5,500 every year until age 50, then bumps up contributions to $6,500 for the next 15 years, will have more than $2.4 million in the Roth by age 65, according to Fidelity. (This assumes his investments earn 7% per year.)

And even if he doesn’t earn enough to contribute the full $5,500 in the early years, he’ll still amass a significant amount of money he can withdraw tax-free in retirement.

Advertisement

Most Popular

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Searching for the Perfect Place to Retire
Empty Nesters

Searching for the Perfect Place to Retire

We home in on two places with less traffic and lower costs. 
July 2, 2020

Recommended

For Financially Responsible Kids, Do NOT Do These 3 Things
family savings

For Financially Responsible Kids, Do NOT Do These 3 Things

The key to putting your kids on the right financial path can be boiled down into one sentence.
July 1, 2020
10 Tax Breaks for the Middle Class
tax deductions

10 Tax Breaks for the Middle Class

Tax breaks aren't just for the rich. There are plenty of them that are only available to middle- and low-income Americans.
June 30, 2020
Stars Align for Some Special Wealth Planning Opportunities
Roth IRAs

Stars Align for Some Special Wealth Planning Opportunities

A confluence of special tax, interest rate and market circumstances makes this a great time to execute income and wealth planning strategies that can …
June 26, 2020
Retirees Get Another Break with Expansion of RMD Waiver
required minimum distributions (RMDs)

Retirees Get Another Break with Expansion of RMD Waiver

The CARES Act cancelled "required minimum distributions" for 2020...and the IRS just expanded that relief to help more seniors and give more time to u…
June 24, 2020