Teenagers: Don’t Lose This Summer Job Advantage
By the time you read this, you might be thinking, “The summer is almost over.”
That doesn’t change anything. Believe it or not, it’s not too late to take full advantage of this summer job opportunity. In fact, you probably have until next April to make your final decision.
Unfortunately, most times teenagers only think of summer jobs in terms of short-term goals like movie money, buying a car or even paying for college.
Those who have the future in mind, however, understand the true long-term benefit a summer job offers. Teen earnings qualify for IRA contributions, and that can yield tremendous returns when your child retires. For example, saving the maximum annual contribution in a Child IRA ($6,000) each year from age 13 through age 18 grows to $2½ million dollars at age 70 (assuming an 8% annual growth rate).
This isn’t rocket science. It’s straight-forward math that everyone can understand.
If it’s that simple, why doesn’t everyone do it?
Retirement advisor Jonathan DeYoe, President of Mindful Money in Berkeley, California, uses this approach. He has two teenagers and he’s set up Roth IRAs for both of them. He’s one of several financial professionals who grasp the significance of a Child IRA and have been quick to seize this opportunity for their own children.
Yet, DeYoe notes many parents don’t do this for a variety of reasons. “They are bad enough at funding their own IRAs,” he says, “and they don’t know that this is an option.” Furthermore, he adds “Their advisors are not thinking of the very long-term (or don’t understand the incredible power of funding the Roth IRA for a 12-year-old, namely 60 years of compounding).”
Naturally, the 7-digit retirement growth at age 70 sounds incredible even to you, but you might worry that this pot of gold at the end of the Child IRA rainbow lies too far in the distant future to entice your child. Worry not. Most children are impressed by 5-digit dollar amounts, and that’s achievable in a short time frame.
Speed is of the essence to make the lesson hit home. The Child IRA rapidly becomes an educational tool (no matter what your child’s age).
“They learn about the power of saving and the power of compounding,” says Arvind Ven, CEO of Capital V Group in Cupertino, California. “If they can learn discipline through deferred gratification, that will be an added bonus. If the funds compound even in single digit percentages on average every year, they could have a seven-figure nest egg (tax free if it is a Roth) at retirement.”
While you shouldn’t discount the growth aspect of using your teen’s summer earnings to begin funding a Child IRA, these vehicles offer plenty of other rewards.