Merit to start investing with ROTH IRA for Teenagers
Did you have a summer job during this summer break?
I think many high school students work part time during a summer break. Do you have any idea how you are going to manage your money that you have earned and can spend at your convenience?
I recommend you save some of the income you earned, although you may have lots of things that you love to buy.
For teenagers, retirement and investment would be beyond their imaginations. If you retire at age of 67, that’s fifty years from now! It wouldn’t be so cool to think of your retirement life or saving for retirement, you my think.
However, one of the most important elements for building wealth is “Time”.
Longer time you have to build your wealth, more successful you will be to create abundant wealth with a power of compound interest.
You can also start investing with small amount of money, because you have long time ahead.
In this blog, I will talk about how teenagers can start saving and investing in order to build their own wealth.
Start with ROTH IRA
Have you heard of ROTH IRA?
IRA stands for “Individual Retirement Account”, and is an account that can be used to save for retirement fund. There are two kinds of IRA accounts – Traditional IRA and ROTH IRA. Each account has it’s own advantage for tax. Deferred taxes for Traditional IRA and tax exemption for ROTH IRA.
If you are interested more, please read my blog that explains IRA. (Written in Japanese)
You can use your after-tax income for investing in a ROTH IRA account. However, dividends, interest and capital gains earned in a ROTH IRA account will grow without being taxed. You can start withdrawing money in your ROTH IRA account without tax when you become 59 and 1/2 years old. (There are some other rules that need to be satisfied in order to withdraw without being taxed.)
Why investing with ROTH IRA
Earned income from your part time job is qualified for investing in ROTH IRA. So why don’t you start investing some of them now to take advantage of long time ahead?
As explained before, the advantage of using a ROTH IRA account is your investment will grow without being taxed. Though you need to use the after tax income for investing in a ROTH IRA, the tax imposed on your earned income will be immaterial.
More income you earn in the future, higher the tax rate will be for you, but the growth generated in your ROTH IRA account can be withdrawn with tax exempt fifty years later.
Let’s see an example for how a teenager can start investing in a ROTH IRA account.
As shown in this example, other people not only Kate can match additional amount to her account up to her total earned income.
There are other important rules for ROTH IRA that you should keep in mind.
How to open a ROTH IRA account for Teens?
Let’s see how you can open a ROTH IRA account for teens.
If you are younger than 18 years old, one of you parents needs to open an account as a custodian.
The account opened under your name by your parent is called “Custodial ROTH IRA Account”, and the custodian (your parent) will be responsible for managing the fund in the account until you become 18 years old.
When you reach 18, the custodial account will automatically change to a regular ROTH IRA account for yourself.
Currently there are only a few brokerage firms where you can open a custodial ROTH IRA account, such as those listed below.
Charles Schwab, E*Trade, Fidelity, Merrill Edge, TD Ameritrade, and Vanguard.
First step to build wealth with ROTH IRA
When a custodial ROTH IRA account is open by your parents, you can send a contribution to the account. Now you are ready for building your own assets.
However, you may have no idea how to do investment, what to invest in, and where to start after all.
After you made a contribution to the account, why don’t you start with investing in Mutual Funds or ETFs so that your money can start working for you as soon as possible.
You can also buy some stocks of companies you are interested in, or index funds for S&P500.
Either way, it’s recommended that you start learning how to do investment with your parents or a financial advisor.
I wrote some blogs about successful investment, so please refer to them as well. (Written in Japanese)
Retirement is far away in the future for teenagers, and you may want to spend the money you earned for going out for movies with friends, a good computer, or your favorite games.
You can spend some on your favorite staff. I suggest you also save some at the same time. You can start with just10% of what you earned. That shouldn’t be so difficult.
If you start learning investment, the knowledge you gain will become valuable assets in the future. Small but regular savings could grow to sizable assets with a power of compound interest and time.
Even if you make some mistakes in investment, a risk is lower for small amount of investment, and you have enough time to recover from a loss and will learn more about investment.
Please remember that most important advantage for investment is time. Earlier you start, more successful you will be to achieve your financial goals in the future.
Good luck in learning how to invest. Please remember Time is your best advantage in investment!