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The Secret to Saving for Retirement: Start Before You’re 20

"It's never too early to learn how to manage your money. Teaching kids to invest, save and, plan for the future is more important than ever." William Levy, Founder and Senior Director - IGRE


Earnings from summer jobs can be invested for decades of tax-free growth

Chelsea Shaver started saving for retirement in eighth grade.

A certified beekeeper, she tended four hives along with her mom in their backyard in Charlotte, N.C. She processed the honey, filled and labeled jars, and made local deliveries by bicycle. Rather than spend the nearly $5,000 she netted, Chelsea, now 14 years old, used the money to fund a Roth IRA, where it can grow tax-free over her lifetime and beyond.

While many Americans haven’t saved for retirement at all, some are getting a really early start, with the help of parents and grandparents and financial advisers. Chelsea’s mother, Jo Shaver, and her financial planner, Leah Maybry, are behind the kid Roth IRA idea. Her brothers have Roth IRAs, too, funded with earnings from more-traditional teenage jobs in retail and as a camp counselor.

“It grows forever tax-free. It’s a no-brainer,” said Maybry.

Among the options for those who are younger, a Roth IRA makes sense because of the tax advantages. Once a child earns income, they are eligible to open up an individual retirement account. By making it a Roth IRA, children can get decades of tax-free compounding, giving them the potential to build a meaningful nest egg with little money down.

Chelsea Shaver used the money she earned from beekeeping to open a Roth IRA. PHOTO: JO SHAVER

A traditional pretax IRA, which offers an upfront tax break, is of little or no value to a teenager. A Roth IRA makes sense when your present earnings are likely lower than what you will earn in retirement. Unlike a traditional IRA, contributions to a Roth are made after taxes. Teens are ideal candidates, since most pay very low or no taxes.

Roth IRAs for teens are gaining in popularity. The average age of those with custodial Roth IRAs, where an adult sets up the account with the child as beneficiary, is 13.7 years, Fidelity Investments said. The number of these accounts in June grew 28% year-over-year.

How to open a Roth IRA

If you’re under 18, you need an adult to act as custodian and control the account. There is some paperwork to transfer it to your name later, typically when you reach 18 or 21, depending on your state.

John Becker, of St. James, Minn., helped his youngest daughter, Ellie, open a custodial Roth IRA at Vanguard with summer-job earnings working at a local marina on the dock crew before college. He decided not to help fund it but to provide investment advice, recommending she stick to index funds for the long term. (She has a Robinhood account for short-term savings and learning the markets.)

Now she is a junior in college and using money earned at a construction-management summer job to make Roth IRA contributions for 2023. “This is money she’s not saving to buy a new car or fund a vacation. This is long haul. You have to have that mentality,” Becker said.

Earnings from part-time work, summer jobs, paid internships, self-employment, even a parent’s business can all count as income for purposes of how much you can contribute to a Roth IRA. Allowances and birthday gifts don’t count.

The maximum contribution for 2023 is the amount of your earned income up to $6,500. You have to have earned income in the year for which the contribution is made, and income limits apply.

If you’re 18, you can open a Roth IRA on your own. Justin Purves joined the military when he was 18 and contributed to the federal retirement-savings plan to get the government match for the four years he served. He also opened a Roth IRA at E*Trade so he would have more investment choices.

By Ashlea Ebeling - The Wall Street Journal

Sept. 9, 2023 9:00 pm ET

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