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.

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 And the Roth offers flexibility: Contributions can be withdrawn at any time without penalty or taxes.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.

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