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:

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.

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.

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