Advertisement
retirement

How Teens Can Start Investing Through a Roth IRA

By beginning to invest in a Roth IRA at an early age, today’s teens can become tomorrow’s millionaires.

Question: My grandson earned $1,000 during a summer job, and he now wants to open a Roth IRA account. How does he get started?

Answer: If your grandson isn’t a minor, he can open a Roth IRA on his own at an investment firm. If he’s younger than 18, though, either you or one of his parents will have to open what is known as a custodial IRA. These accounts are managed by you or his parents until he is no longer a minor (typically at age 18), at which time he assumes control of the account. Fidelity, Schwab and TD Ameritrade offer Roth IRA custodial accounts that have no minimum investment requirements and no maintenance fees, making them good options for young workers with small sums to invest.

In the IRA, your grandson will be able to invest in a variety of stocks, bonds, exchange-traded funds and mutual funds. Target-date funds, for instance, are a good option for investors who are getting started and unsure of what to invest in. Your grandson basically selects the target-date fund with the date closest to the year he expects to retire, say 2065, and a professional manager does the rest – from choosing investments to gradually shifting to a more conservative portfolio as investors approach retirement.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

Make sure you check the investment and account fees, which can erode returns over time. Look at a fund’s expense ratio to find out the percentage of your assets that will go toward management, administrative and other expenses each year. Other fees might also apply.

 Your grandson will be able to contribute up to his entire summer’s earnings - $1,000 - to the Roth. As he earns more, he can contribute more—within limits. For 2019, the maximum Roth contribution is $6,000 for workers younger than age 50.

A Roth IRA is a particularly powerful tool for young workers. It allows them to turn even small contributions into a sizable tax-free nest egg in retirement. Money goes into the account after taxes have been paid, but thereafter it grows free of taxes. And the Roth offers flexibility: Contributions can be withdrawn at any time without penalty or taxes.

 Your grandson is smart to get an early start on saving and investing. If he is 18, continues to add $1,000 a year to his Roth and earns a 7% average annual return, he will amass more than $325,000 by age 65. That amount could reach $1 million or more by retirement if he increases his contributions over time.

Advertisement

Most Popular

Chiropractor Trying to Get Business the Wrong Way – Illegally
careers

Chiropractor Trying to Get Business the Wrong Way – Illegally

A new chiropractor’s fledgling business plan to attract patients may sound reasonable at first look, but it’s actually against the law, and the same p…
June 30, 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
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

Recommended

Resources for alternative forms of transportation needed by many older adults
retirement

Resources for alternative forms of transportation needed by many older adults

For many older adults, having an alternative mode of transportation may be the difference between independence and social isolation.
June 29, 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
Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020
12 Ways to Get Your Retirement Plan Back on Track
retirement planning

12 Ways to Get Your Retirement Plan Back on Track

If your financial situation hits a rough spot, there are a number of things you can do to get your retirement plan moving in the right direction again…
June 19, 2020