Is your teenager working this summer? Consider opening this account

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Like many people, I got my first “real job” (meaning one that didn’t involve working for my parents’ small businesses for a little extra money every now and then) when I was 16 years old. I worked for a local discount bookstore, and although some of the money I earned from that job and later in high school helped me cover some car ownership costs, I spent most of what I earned on typical teenage expenses. However, I really wish I had invested some of that money.

If you have a teen who has a summer job this year, you’re probably hoping they’ll save some of that money for the future, too. And luckily, you can open a custodial Roth IRA for them to help them start investing now.

Learn more: unlock best-in-class benefits with one of these brokerage accounts

Do you have earned income? You can fund a Roth IRA

An IRA (also known as an Individual Retirement Account) is a tax-advantaged investment account that you can open on your own, through any brokerage that offers it (most of the best brokers do it). A traditional IRA is funded with pre-tax dollars, so it reduces your taxable income now (you pay taxes on withdrawals you make in retirement).

A Roth IRA is a little different: It’s funded with after-tax dollars, but in exchange for giving up that upfront tax break, you get a tax break when you make withdrawals. You can also withdraw your contributions at any time, but you must wait at least five years after opening the account and be 59½ or older to withdraw the money you earned on your investments without penalty.

You must have earned income to fund an IRA of any kind in order for your hard-working teen to qualify. And your teen is certainly in a lower tax bracket with their summer job than they will be later in life – so now is an especially great time to take advantage of a Roth IRA. If they are under 18 (or 21, depending on your state), you will need to open the account for them and serve as a custodian to manage it. The time spent making sure the account is opened, money is paid out, and investments are funded will surely be worth it to put your child on the path to future financial security.

How much could $500 grow over time?

Now that you know more about how Roth IRAs work, we can look at a sample scenario. Let’s say your teen is feeling ambitious and wants to invest $500 in a Roth IRA. If we assume there are eight weeks of summer left (the months of July and August), that comes out to $62.50 per week. (That sounds more manageable already, right?)

If your teen uses money from their Roth IRA to invest in stocks, they could expect a 10% annual return over time — the average annual return of the stock market over the past 50 years. How much could that $500 be?

Data source: Author’s calculations using the Investor.gov calculator.

Leave $500 generating a 10% annual return in place over three decades, and it will grow more than 17 times. Now imagine if your teen made a habit of saving and investing a portion of every paycheck they receive in the future – not just this summer. That $500 could be just the start of a successful investing career and represent the chance to enter adulthood with a useful habit (and an investing account) already in place for the future.

The best time to plant a tree

As the saying goes, the best time to plant a tree was 20 years ago, but the second best time is now. Starting to invest as a teenager can do great things for your child, so consider giving them the opportunity with a Roth IRA.

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