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Helping Young Workers Open a Roth IRA

It's not too early for kids with part-time or summer jobs to contribute to a Roth IRA. Even a small investment now can turn today's teen into a millionaire by retirement.

Question: My 16-year-old son earned some money helping out at a summer camp last year. Is he eligible to contribute to a Roth IRA, and is it too late to make a 2017 contribution? What are some IRA administrators that let kids open a Roth with just a little money?

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There's no minimum age to be eligible to make Roth IRA contributions; you just need to have earned income from a job. Your son can contribute up to the amount of money he earned from his job for the year, but no more than the $5,500 maximum for 2018. You can even give him the money to contribute. He has until April 17, 2018—the tax deadline—to make a contribution for 2017.

Contributing to a Roth IRA can be one of the smartest financial moves for teenagers starting to work. Even contributing a small amount at first can make a huge difference over the long run. Here's the math: Say your son invests $1,000 each year to a Roth IRA from ages 16 to 21. From ages 22 to 49, he contributes $5,500 a year—the current maximum. At 50, when he's eligible to make an additional $1,000 in catch-up contributions, he starts putting in $6,500 a year until age 65. At that point, assuming his investments gained 7% a year, his Roth would be worth more than $1.74 million, says Anthony LaBrake, a certified financial planner with Adam Financial Associates in Boca Raton, Fla. Your son can withdraw all of the money, including earnings, tax-free after age 59½. (He can withdraw his contributions without penalty or taxes at any time.)

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Your teen may cringe at the idea of saving his entire summer paycheck for retirement. But you can give him money to put into the Roth or match his contributions to help him develop a savings habit. LaBrake works with quite a few parents and grandparents who give their teenager or young adult the money to make the Roth IRA contributions, up to the amount they earned from working. "This helps them get a jump on retirement savings and also acts as a sort of secondary emergency fund, since they can withdraw from a Roth up to their basis without penalty," he says.

Many IRA administrators will let you open a Roth IRA for a minor, but you may need to sign some extra forms. You can, for instance, open a Vanguard Roth IRA for a minor with a minimum of $1,000 and invest in a variety of mutual funds. For a teen's IRA, Vanguard spokesman John Woerth recommends Vanguard's Target Retirement Funds, a broadly diversified portfolio of four to five low-cost index funds based on your investing time frame. A minor with less than $1,000 to invest can open a brokerage IRA at Vanguard and invest in stocks or exchange-traded funds. For example, he could buy a few shares of the Vanguard Total Stock Market ETF, which currently trades at about $137 per share and offers broad U.S. market exposure, says Woerth. Vanguard usually charges a $20 annual fee for accounts with less than $10,000, but it waives the fee if you sign up for electronic delivery of statements, confirmations and other documents.

Many of LaBrake's clients open custodial Roth IRAs through Charles Schwab. These accounts require a minimum investment of $100 with no maintenance fees. Fidelity and TD Ameritrade also offer custodial Roth IRAs with no minimum investment and no maintenance fees.

For more information about Roth IRAs, see New Tax Law Makes Roth IRA More Appealing to Savers.

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