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.

A Roth IRA can be a great way for a child or grandchild to begin saving for retirement while learning about investing.

A child can utilize a Roth IRA as long as he has some kind of income for the year. If the child isn’t a minor, he can open a Roth IRA at an investment firm. However, if the child is younger than 18, an adult will have to open what is known as a custodial IRA. These accounts are managed by an adult, such as the parents or grandparents, until the child is no longer a minor (typically at age 18). At that time he assumes control of the account. 

In the IRA, the child 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 child or grandchild 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.

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.

There are limits on contributions to Roth IRAs. For 2021, 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 And the Roth offers flexibility: Contributions can be withdrawn at any time without penalty or taxes.

It is smart to have your child or grandchild get an early start on saving and investing. For instance, 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.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
11 Best Healthcare Stocks for the Rest of 2021
healthcare stocks

11 Best Healthcare Stocks for the Rest of 2021

The 2020s could be the decade of healthcare stocks. Here are 10 companies and one ETF to watch not just for the remainder of this year, but well beyon…
July 13, 2021
Warning: You May Have to Pay Back Your Monthly Child Tax Credit Payments
Tax Breaks

Warning: You May Have to Pay Back Your Monthly Child Tax Credit Payments

Unlike stimulus checks, you might have to repay your monthly child tax credit payments if you get too much money from the IRS.
July 16, 2021

Recommended

How Patients with Lasting Symptoms of COVID Can Apply for Disability
Financial Planning

How Patients with Lasting Symptoms of COVID Can Apply for Disability

Those who can no longer work because of COVID-19 may qualify for these benefits but the approval process can be a difficult road.
July 30, 2021
Older Adults Battle Long-Term Effects of COVID-19
Financial Planning

Older Adults Battle Long-Term Effects of COVID-19

Seniors are more likely to suffer from long COVID, and it's unclear when, or even if, they will fully recover.
July 29, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
July 26, 2021
10 Least Tax-Friendly States for Retirees
retirement

10 Least Tax-Friendly States for Retirees

When it comes to state and local taxes, retirees in these states are likely to pay more than retirees in other states.
July 26, 2021