HomeUSARoth IRAs can be key for teen workers in a hot summer...

Roth IRAs can be key for teen workers in a hot summer job market

For years, fewer teenagers were looking for summer jobs, opting instead to bolster their college applications with academic programs or unpaid internships. But as the economy bounced back from the pandemic, employers were almost begging for workers and some opportunities were too good to pass up.

With more flexible work arrangements and better pay, the share of teens working during the summer has jumped.

That’s given young workers a rare opportunity to get a valuable head start on long-term savings, according to Ed Slott, CPA and founder of Ed Slott and Co.

“The greatest money-making asset is time,” he said.

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A strong summer for teen employment

Overall, more than 6 million teens, or 36.6%, had a paying job for at least part of last summer, marking the highest summer employment rate for teenagers since 2008, according to a Pew Research Center analysis of data from the U.S. Bureau of Labor Statistics.

Economists are predicting another strong summer for teen employment in 2022. Already, about 5.5 million 16-to-19-year-olds were employed as of May, according to Pew’s report. (July is typically when youth employment peaks.)

And wages are still rising. Average hourly wages for teen workers grew five times faster than average wages among all workers in the first few months of the year, notching 4.1% wage growth for 15- to 19- year-olds, compared with 0.8% wage growth across all age groups, according to data from payroll platform Gusto.

How to make the most of your summer earnings

Slott recommends opening a Roth individual retirement account to get a head start. Since there are no age restrictions, anyone with earned income, say from a summer job, can contribute.

Even if a teen only puts some money away, parents can add funds on their child’s behalf, as long as the combined amount doesn’t exceed the teenager’s earned income for the year. 

Also, note that there is a maximum IRA contribution limit of $6,000 for 2022.

In an example provided by certified financial planner Stacy Francis, president and CEO of Francis Financial in New York: If your teen makes $2,000 at their local ice cream shop over the summer and saves half of this in their Roth IRA, parents can contribute up to $1,000 more to the investment account for a total of $2,000.

Even if no one ever contributed again, left to compound that initial $2,000 contribution could grow significantly over your child’s work life. Assuming an average annual return of 7% over a 50-year span, $2,000 put in at age 17 could grow to more than $65,000 by retirement at 67.

“You don’t want to leave anything on the table,” Slott said, who opened a Roth IRA for his daughter when she got her first summer job at age 15. “They have that opportunity now with dollar one to start tax-free retirement savings.”

If retirement seems too far away, account holders can withdraw their contributions at any time without taxes or penalties if, for instance, they need the money for college or a down payment on a house down the road, according to Slott. Think of it like “an emergency tax-free savings account,” he said.

“This removes that barrier in your mind that you have to wait until 59½.”

Meanwhile, both the investment and all the interest, dividends and growth on these assets will accumulate over time. “Roth money will never be eroded by current or future taxes,” Slott said.

It’s also a great teaching tool to underscore “the value of saving for the long term,” he added.

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