If you have a teenage kid who works, DO NOT give them cash for their birthday or during holidays. Do this instead.

Written by Sunwook Jin, CFP®, CRPC®, CMFC®

Every now and then, you want to give them a nice gift for your kid’s birthday or during holidays. But then, you think to yourself, they have everything they need, and you can’t think of a nicer gift. So, you buy them either a gift card or just give cash. Then, they spend that money on something you don’t approve of. But, you can’t say anything because that was your “gift”

If your teenage kid is working after school, over the weekend or during school breaks, you may want to help them open a Roth IRA and help them fund it.

What is a Roth IRA?

In a nutshell, a Roth IRA is an Individual Retirement Account that allows a qualified person to contribute after-tax income up to $6,000 per year (in 2019). Both earnings on the account and withdrawals after age 59½ are tax-free.

You might be thinking…. what? 59 1/2? that’s a long time from now for my kid.

I know. It’s a really long time from now. But, I only wish someone told me about this when I was 16. I could’ve had a huge jump start.

As an example, if you had open this account at age 16 and contributed just $2,000 per year and if it grew 8% per year, take a look at the chart below. You would have over one million dollars at age 63…. and it’s tax-free.

Example 1:

AgeBeginningContributionGrowthEnding
16$0$2,000$160$2,160
172,1602,0003334,493
184,4932,0005197,012
197,0122,0007219,733
209,7332,00093912,672
2112,6722,0001,17415,846
2215,8462,0001,42819,273
2319,2732,0001,70222,975
2422,9752,0001,99826,973
2526,9732,0002,31831,291
2631,2912,0002,66335,954
2735,9542,0003,03640,991
2840,9912,0003,43946,430
2946,4302,0003,87452,304
3052,3042,0004,34458,649
3158,6492,0004,85265,500
3265,5002,0005,40072,900
3372,9002,0005,99280,893
3480,8932,0006,63189,524
3589,5242,0007,32298,846
3698,8462,0008,068108,914
37108,9142,0008,873119,787
38119,7872,0009,743131,530
39131,5302,00010,682144,212
40144,2122,00011,697157,909
41157,9092,00012,793172,702
42172,7022,00013,976188,678
43188,6782,00015,254205,932
44205,9322,00016,635224,566
45224,5662,00018,125244,692
46244,6922,00019,735266,427
47266,4272,00021,474289,901
48289,9012,00023,352315,253
49315,2532,00025,380342,634
50342,6342,00027,571372,204
51372,2042,00029,936404,141
52404,1412,00032,491438,632
53438,6322,00035,251475,882
54475,8822,00038,231516,113
55516,1132,00041,449559,562
56559,5622,00044,925606,487
57606,4872,00048,679657,166
58657,1662,00052,733711,899
59711,8992,00057,112771,011
60771,0112,00061,841834,852
61834,8522,00066,948903,800
62903,8002,00072,464978,264
63978,2642,00078,4211,058,685
641,058,6852,00084,8551,145,540
651,145,5402,00091,8031,239,344

Here is another example with $6,000 per year and grew 8% per year, take a look at the chart below. You would have over one million dollars at age 49.

AgeBeginningContributedGrowthEnding
16$0$6,000$480$6,480
176,4806,00099813,478
1813,4786,0001,55821,037
1921,0376,0002,16329,200
2029,2006,0002,81638,016
2138,0166,0003,52147,537
2247,5376,0004,28357,820
2357,8206,0005,10668,925
2468,9256,0005,99480,919
2580,9196,0006,95493,873
2693,8736,0007,990107,863
27107,8636,0009,109122,972
28122,9726,00010,318139,290
29139,2906,00011,623156,913
30156,9136,00013,033175,946
31175,9466,00014,556196,501
32196,5016,00016,200218,701
33218,7016,00017,976242,678
34242,6786,00019,894268,572
35268,5726,00021,966296,538
36296,5386,00024,203326,741
37326,7416,00026,619359,360
38359,3606,00029,229394,589
39394,5896,00032,047432,636
40432,6366,00035,091473,726
41473,7266,00038,378518,105
42518,1056,00041,928566,033
43566,0336,00045,763617,796
44617,7966,00049,904673,699
45673,6996,00054,376734,075
46734,0756,00059,206799,281
47799,2816,00064,422869,704
48869,7046,00070,056945,760
49945,7606,00076,1411,027,901
501,027,9016,00082,7121,116,613
511,116,6136,00089,8091,212,422
521,212,4226,00097,4741,315,896
531,315,8966,000105,7521,427,647
541,427,6476,000114,6921,548,339
551,548,3396,000124,3471,678,686
561,678,6866,000134,7751,819,461
571,819,4616,000146,0371,971,498
581,971,4986,000158,2002,135,698
592,135,6986,000171,3362,313,034
602,313,0346,000185,5232,504,556
612,504,5566,000200,8452,711,401
622,711,4016,000217,3922,934,793
632,934,7936,000235,2633,176,056
643,176,0566,000254,5653,436,621
653,436,6216,000275,4103,718,031

Opening A Roth IRA For Your Kid(s) offers you the chance to sit down and teach the value of saving and investing instead of shouting at them to just clean their room. This would be a great life lesson for them and teaching opportunity for you.

Take these steps in order for you to get started for your kid’s Roth IRA.

Step 1 – Can my child open a Roth IRA? If so how much?

If your child has a qualified income (typically money they earned from working and not from interest they earned from savings or investment accounts), (s)he/ can contribute 100% of earned income or up to $6,000 whichever is less to Roth IRA. Or you can also help contribute up to their limits. So, it doesn’t matter if they contribute with their own money. If they have qualified income, anyone can contribute to their Roth IRA.

Step 2 – Where to open a Roth IRA?

You can open the Roth IRA at a bank, investment brokerage firm, annuity company, mutual fund company or independent advisory firm, etc.