Why Your Teenager Should Have a Roth IRA

In 2002, I read Kevin McKinley’s book: Make Your Kid a Millionaire: 11 Ways Anyone Can Secure a Child’s Financial Future. One suggestion is starting an IRA for your kids when they start working.

Retirement planning for a 14 year old? Sounds like a crazy idea. But look closely at the math and you’ll realize those small contributions grow the most.

The reason this works? The amount of time the investment grows. Remember that Einstein is sometimes credited with declaring, “Compound interest is the most powerful force in the universe.”

Why not put this force to work in your family?

Since many teens are starting their first job this summer or working more hours now that school is out, let’s look at why a working teenager should have a Roth IRA.

1. Good habits start early.

Teaching a working teen to budget their income is a good lifetime habit. Under the three big categories of Give, Save and Spend, a Roth IRA contribution falls under the Save area.

The Average American only has $35,000 in retirement savings and saves around 3.7% of their income. That is way short of the advised 10-15% for retirement savings. Start a teen putting aside 10% or more for retirement now, and hopefully the habit will continue when that $200 paycheck becomes a $2,000 paycheck.

2. Time – the most important reason!

Small seed contributions today will become mighty retirement redwoods. Contributions in a Roth IRA during the teen years will be the portion that grows the most over the next 50 years.  Time is one of the most important elements of a successful retirement plan.

Example 1 from My Nephew’s Summer Internship

Ethan, age 16, contributes $500 from his summer internship over the next five summers. That $2,500 at 8% conservative growth will become around $137,000 at age 65.

If Ethan is able to put aside $1,000 over the next five summers at 8%, the balance will be around $275,000. A quarter million dollar retirement for the price of $5,000. That’s a big deal!

Example 2 from David Bach’s Automatic Millionaire

Terry contributes $3,000 a year from age 15 through 19 at 10% return and has a balance of $1,615,363 at age 65 from $15,000.

Kim starts contributing $3,000 a year from age 27 until age 65 and only has a $1,324,778 balance after $117,000 in contributions.

Example 3 from Financial Peace University

Ben, age 19, contributes $2,000 to a Roth IRA for 8 years at 12% growth. At 65, the account balance is $2,288,996 from $16,000 in contributions.

Arthur starts contributing $2,000 from age 27 through age 65 and has an account balance of $1,532,166 from $78,000 in contributions.

As you can see, time plays a very serious, important role in investment growth.

3. Pay little or no taxes now for a tax-free retirement.

A teen’s annual income typically falls within the lowest tax bracket – essentially making these working years the lowest taxed of their lifetime. It can also fall under the standard deduction so that very few taxes are paid at all beyond Social Security and Medicare contributions.

By contributing to a Roth IRA, your teen can have a nearly tax-free retirement contribution and growth. Withdrawals in retirement will be tax-free during a time when their income and the tax brackets will be higher.

4. Flexibility with life’s choices.

Starting a Roth IRA in the early working years gives flexibility down the road.

Stay-at-Home Parent

A stay-at-home parent will have financial peace of mind while they do the most important job in the world knowing their retirement is still growing. Even though a SAHP is eligible for a spousal IRA, the household budget might be tight on a single income for a few years with little or no extra for retirement savings.

Low-Paying Vocations

We all want our children to find and follow their passions in life – but many do not come with a high-paying job or a retirement plan. A Roth IRA that builds over 60 years with small annual contributions can grow into a decent retirement asset.


Pre-retirement age adults have a greater chance of becoming disabled than dying. Putting money to work early in a Roth IRA helps lower the risk of not having any retirement savings because you had to stop working right at the time when you were planning to start putting money aside.


Your teenager, in their adulthood, may have to choose between caring for someone or working. They might want to be a SAHP, homeschool their children, provide long-term care for a child with different abilities, and/or help with aging parents or other family members. Having a Roth IRA that continues to grow during those exits from the workforce can be a comfort.

How a Teen Can Open and Contribute to an IRA

Opening a Roth IRA Account

Since a teenager is a minor, an adult will have to help open a Roth IRA account as the custodian. In most states, the adult will have control over it until the teen is at least 18 years old. Vanguard has a $1,000 minimum deposit on an IRA account with limited investment choices but other companies offer a low-opening deposit with automatic monthly investing.

You need to research to find the right mix of investment options, low opening balance requirements, and management fees.

Teen Contributions

The working teen can set aside a portion of every paycheck to contribute to the IRA. A general rule of thumb for adults is 10-15% of take-home pay.

Matching Contributions

You may encourage your teen to put money in an IRA by matching your contributions. Talk about whether you are interested in matching 5-100% of their contribution to help kick-start their IRA.

Parent/Grandparent Contributions

Some teens receive gift or spending money from their parents or grandparents during the year. Their IRA contribution doesn’t have to be directly tied to their paycheck – the only rule is you can’t put more into your IRA than you earn up to a maximum of $5,500 in 2013.

This is a great way to pass down wealth without inheritance taxes.

Final Thoughts

Our teens have been working and building up a Roth IRA balance for the past nine years as part of our family’s big picture financial plan from a variety of contribution sources. While a portion of the contributions are from us, we feel like the gift of time and tax-free growth is worth more than the actual money given.

What would you tell a teenager about saving for retirement? Does a teen in your home have an IRA? Leave a comment!

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  1. Kat

    Goodness. I wish someone had explained this to me when I held those high school and even college summer jobs. Yes I needed the money then–for entertainment, clothes, gas for the car, school books, etc. But looking back today, I wish I’d saved it into a ROTH. Or that when my husband and I were first married, discussing a family and me becoming a SAHM, that we’d shoved everything we could into Roths for both of us. Now we are looking at college tuition at the same time as retirement, aging parents, etc. We still plug away at retirement, and according to the calculations, will be fine….but if only….

    I’m going to propose when the kids get their summer jobs, they put 50% into a Roth. In college, they can reduce this to 25% if needed for tuition (no student loans here!) And those first few years of earning on their own….SAVE, SAVE, SAVE!

    • Cherie

      Kat – You hit on a key point….as parents or influential adults, we need to talk to teens about the responsibilities of money at all points in their lives. Even though they might not technically understand, we still need to have these conversations and be a partner with them in their early financial education.

      Kids ask WHY? all the time. Why do I need to wear a coat today, why do I need to worry about essay paper grade in relation to college admissions, why do I need to brush my teeth regularly? They don’t see or appreciate the long range consequences of decisions today.

  2. This is a great idea and one that I’ll for sure do for my kids. Even though I saved quite a bit growing up, I wish I would’ve started a retirement fund. It instills good habits and who can argue with having a few hundred thousand (or million) in the bank at retirement.

    • Cherie

      Jake – I’m happy to see this will be a conversation you will have with your kids!

  3. joe

    Where does that 8% figure come? I can’t get 1% on a CD. Betting on the future……well look at today. I prefer to invest in myself. Rehab houses. Get a part time job entertaining, painting, etc. looking back at 30 years of annuities, Roth, etc. I did OK because I cashed out at the right time. Just dumb luck. My yield was not much better than CDs with no risk. Sorry. I don’t believe in investing after 40 years of life experience. Again, I did OK. But the yield was marginal and a lot of sleepless nights.

    • Cherie

      Joe – Dan does a great job outlining why I used 8%. That is conservative but our markets have been going through historical changes these past 5 years. Many of my mutual fund investments have been averaging 15% for the past couple of years. There have also been low or no growth years, but contributions to retirement & nonretirement accounts were then bought on the “cheap” and have helped contribute to the healthy balance of today.

  4. John Van

    An excellent article with excellent advice. I wish every teen would read this article and take its advice. The effects of compounding interest are powerful at a young age some have a hard time believing it when you show them. Great advice for all young people.

    • Cherie

      John – Thanks. Share these concepts, articles, and books with the young people around you. Even if you don’t have children this age in your home, we can offer to talk to groups of young people in our civic and faith communities.

  5. Dan

    @Joe, have a look at a Mutual Fund prospectus for the “Average Annual Total Returns” details. They show you the interest rate achieved for 1, 5, 10-year periods. Vanguard’s Dividend Growth Fund 10-yr return is 8.5%. Sounds like you either got some bad advise, or relied on your own limited knowledge of investing principles. There a lots of Christian (more honest?) Financial Planners, CPA’s and yes estate-planning lawyers that can help you in this area. Everyone’s situation is unique, glad you did OK.

    • Cherie

      Dan – Thanks for a great explanation of my 8% estimates.

  6. Beth

    I was just talking about this with my 15 year old daughter the other day and meant to pull some numbers for her showing the compounding interest so this article is timely. I wish someone would have convinced me to save some of the money I started making when I was mowing lawns and delivering papers at 13.
    Joe, I think 8% in a good growth stock mutual fund is conservative. There are plenty out there that have performed even better over a 15-20 year period. We’re talking about compounding interest for 40-50 years-that’s where the huge return comes, along with the tax-free investing (most kids won’t earn enough to owe much) and the tax-free growth with a Roth IRA. Annuities aren’t typically good investment products and if you cashed out your Roth when the market took a turn and still had time to ride it out, they would have likely fully recovered by now. CD’s also aren’t a very good investment product. But I totally agree with investing in yourself and I admire that and also wish I had learned some of the skills you know when I was younger.

    • Cherie

      Beth – My kids have been shown the charts in the Dave R. and David B. example since they were pre-teens. I have copies of Automatic Millionaire (used!) that I pass out to any of their friends that show an interest in how to be better prepared financially in adulthood. Maybe some summer reading titles? 🙂

  7. Jeanne

    My 19 year old recently started a part time job that does offer a plan. I encouraged her to sign on with the thought of time being on her side. I think we should look at rolling it into a Roth for the break on taxes. Thanks for the tip!!! So love your articles!

    • Cherie

      Jeanne – Sounds like this is a great way to introduce your daughter to long term saving and retirement planning! We need to talk to our kids about companies that offer financial products, how to tell the good from the bad, how to pick from a selection of investments, how to read a statement and understand the management fees. and what options are available rather than leave the account behind when you switch jobs.

  8. uclalien

    This is an interesting idea. I was always under the impression that IRA contributions were based on one’s adjusted gross income, not earned income. But it appears I was mistaken.

    My only issue with this approach is that a teenager may have more pressing monetary needs in the nearer future. For example, is it better for a teenager to save for retirement or college? Even in a historically low-interest rate environment, most college graduates are now paying anywhere from 6-10% on their student loans. If interest rates start to rise, which is likely and has been the case in recent months, student loan interest rates could reasonably increase to 12-15%.

    Perhaps a hybrid option would be the best choice: have your teenager invest a portion of their earnings into a Roth, but have them pull out all or a portion of the principal to pay off their student loans if interest rates rise.

    • Cherie

      Uclalien – You highlight some good points.

      Each family is different on their approach to how teens handle money in their household. While there are a wide ranges of great options, I believe the key is doing something that helps them prepare for their future responsibility.

      A summer or part-time job might be the chance to talk about wants v. needs, what items they are responsible for buying from their own money, living below your means, saving for short and long range goals, and giving a portion of every dollar earned.

      Unless there are dire circumstances, we should all be a strong cheerleader in teaching our working teens to set aside 10-15% of all money earned towards big expenses like college, cars, and retirement.

  9. jerrylewis

    saving for the rainy season is a good idea, and it comes in different forms and sizes and ROTH IRA is one of them. The idea of starting early is the best way for a child to gain sustainable amount of money the day he retires.

    • Cherie

      jerrylewis – It’s a small window of opportunity for this amazing growth….and that’s why we need to be proactive with introducing different saving and retirement planning concepts to kids at the right time.

      When they turn 40 and see these charts for the first time….is not the time.

      I can’t tell you how many people I have heard in nearly a dozen Financial Peace & Financial Peace Military Edition classes say – “I wish I had seen that chart when I was young.”

      We have to put it in front of their eyes!

  10. I love your article about saving money at an early age. I did that myself and it really worked out for me. The younger generation unfortunately does not think that way any more: they want everything right now without putting too much work into it. Saving money is the last thing on their list, unfortunately. I am going to forward the link to your article to my son and a few friends. Thanks for these great tips!

    • Cherie

      Elena – As someone wise used to say, “They didn’t learn it from the neighbors.” As parents and influential adults, we need to introduce these money concepts to the young people around us. If we start when they are young, it can be a natural conversation topic as they grow up and learn more about their world.

      Another favorite saying from Dave Ramsey: “Live like no one else so later you can live like no one else.” Simple as that! 🙂