Your teenager may not get rich mowing lawns or babysitting the neighborhood children, but contributing some of those after-school earnings to a Roth IRA can pave the road to a more secure financial future.
Any child with “earned income”, regardless of age, is eligible to contribute. Sure, Roth IRA contributions are not tax deductible but most kids pay little or no taxes anyway. Best of all, the money will grow tax-free for decades.
Even if your child does not receive a W-2 for their work, just keep a record of the dates and hours worked and the amounts earned. Your child can add up to $5000 each year to a Roth IRA and it doesn’t matter where the money comes from. Often, parents or grandparents provide the cash; it doesn’t matter as long as the contribution does not exceed the amount of earnings.
A Roth IRA can be opened at almost any financial institution: consider a discount brokerage or low cost mutual fund company; look for no or minimal annual fees; and finally, choose no-load, low expense ratio index fund as the investment vehicle. The deadline for contributing for the current calendar year is April 15 of the following year.