RSS Feed

Financial Fitness Blog

Time is your teen's best friend when it comes to an IRA

(Retirement) Permanent link   All Posts

Michelle Blog PhotoYou may not think about a teenager opening a Roth IRA, but doing so can be a savvy money move on their part. Time is on your teen’s side because they can benefit from decades of compounding interest in their account.

Compounding is when earnings on your investments are reinvested in your account. The reinvested earnings may also have earnings, and then those earnings are reinvested and on it goes. It’s said that Albert Einstein called compound interest the “eighth wonder of the world.” The earlier teens start saving the better, even if it’s just a small amount.

Your child must have income from a job to open an IRA—gifts of money, interest on a savings account, and allowances do not count. However, the IRS doesn’t care if parents or grandparents actually make (or help with) the contribution as long as it’s not more than the child earned in any given tax year, up to $5,500 in 2013.

Convincing your teen to part with his or her hard-earned money in order to prepare for 2050 or later may be a challenge, but getting their “buy in” can impart a powerful message and instill good financial habits. To help them with the decision, use interactive financial calculators that demonstrate the long-term benefits of compounding interest to get your teen’s attention. You can use the compound interest calculator at the Council for Economic Education's Web site.

Your teen can open an IRA with us for as little as $200 a year. Enroll online in as little as five minutes or call one of our helpful enrollment consultants at 1-800-279-4030.

Learn more about Roth IRAs at the IRS website.

 The Trustee Custodian for the WEAC IRA accounts is Newport Trust Company. This article is for informational purposes only and not intended to be legal or tax advice. Consult your tax advisor or attorney before taking any action.

Michelle Slawny, CFP®