Teens and a Roth IRA

My 14 year old got a seasonal part time job this summer. We have required him to save 1/3 of his pay for a car down the road. The rest of the money he is spending on typical teenage stuff.

I am considering matching his summer income (~500) and depositing it into a Roth IRA in his name. My intent is to get him into the habit of retirement investing early and to teach him about compound interest. At the moment immediate gratification is his middle name. My only concern is that he'll not appreciate the lesson and cash out in his twenties when money is typically very tight. Even that wouldn't be the end of the world unless the money was used for something bad.

Has anyone else set up a Roth when their kid was a teenager? Did it make an impact on their attitude toward saving or was it a complete waste of time?

Remember, I don't think you can contribute more to a Roth than you make in earned income in a year.

I had a brokerage account opened for me when I was in high school, and a small stock purchase made for me (but I got to select the stocks). Learned the basics of investing, etc. Kind of neat.

Not so sure about the Roth, but maybe if you set up some kind of modest and continuous matching program (the 401k of Dad), then it would make him less likely to cash out.

This sounds like a great idea OP. Every year you don't contribute to a Roth is another lost year. I'm pretty sure the OP knows he/she can only contribute up to his earned income (and that's why he's matching it). If I had known about investing at that age, or my parents had taught it to me ealier, I would have dumped every penny I could into my Roth in my teens instead of letting it fester in a savings account. Now that I'm a full time college student and have no earned income, I think about getting a job at Burger King just so I can contribue this year.

There's not much you can do to prevent him from withdrawing, but it's also a little early to tell what he'll blossom into. But I think you're definately on the right track, particularly since it's not his money going into the account. He'll thank you when he grows up and retires 50 years from now, and that $500 is $75k, tax free.

ChildsEyes said: Has anyone else set up a Roth when their kid was a teenager? Did it make an impact on their attitude toward saving or was it a complete waste of time?
My parents invested some money for me (UGMA or whatever) when I was a kid and didn't tell me about it until I turned 25. It worked out very well as I was not aware of it until I was at the point where I was financially responsible.

Just make sure your kid develops a heathly relationship with money. It would take a lot more than $500 in a Roth but I have seen wealth (or, more often delusions of wealth) really mess people up.

When I started working in high school, I opened up a Roth account, and put in most of my earnings there in a custodial account. Best decision of my life, thanks to my parents. i caught the Internet boom, and the Roth really rocketed.

Start early, can't hurt. You can always withdraw the contributions that you put in without penalty, also up to $10,000 each (I think) to pay off student loans and for your first house.

It's important to impart a sense of fiscal responsibility into your kids at a young age, methinks.

Since around 99' my father has placed the maximum allowed by the government, or the equivalent of that years pay for me and my siblings in a Roth IRA account each year. He let us know that he was doing it, and I think it helped all three of us start thinking about retirement at a fairly early age. I know that it is quite possibly the best gift he could have ever given us. There was never "hey dad, can you bum me a $20?" We all had jobs in High School. I'm so glad he didn't buy us some car to crash (I made sure I worked my butt off to pay for a car that I could crash myself, ha!), lots of clothes that all go out of style, etc.


We had to buy virtually everything ourselves, including the majority of college expenses. During the college years there was the occasionally slip the fifty dollar bill in pocket at Thanksgiving, or when heading back at the end of summer vacation, but nothing too major. It seemed to work out fairly well, the balance in my Roth IRA account greatly exceeds the balance of my student loans (17k), and I graduated last May. Neither I nor my sister, and looks like my brother will have any credit card debt. We were definitely frugal in college!

Tell him you will only match money (up to $500) he puts into his Roth, to encourage saving out of his own budget as well. Then, offer to match this same amount every year as long as he does not withdraw anything.

hey there! i will speak from experience... my dad opened a ROTH IRA for me when I was 16(I think that was the minimum age) currently it has my name and "A MINOR" after it. He told me that and I am currently 21 years old. I have maxed out every single year my contributions and has taught me a lot about money. At this current rate, I want to retire in my 40's. I'm current going to be a senior in college and when most of my friends spend their money to do whatever, I just put mine away. It has definately changed the way I looked at life.

"the 401k of Dad" love that line! Although I would add in our case "and Mom!"

Thanks for the feedback everyone....

VirginiaBob says: Tell him you will only match money (up to $500) he puts into his Roth, to encourage saving out of his own budget as well. Then, offer to match this same amount every year as long as he does not withdraw anything.

I really like that idea. I'm not sure for what period of time I would do this... We've got two kids and we've got our hands full trying to max out 401k and two Roths on one income as it is. Not to mention college. Needless to say, I wish I had been mature enough to understand all these issues when I was in my twenties (much less in my teens)!

Codename 47 -- I'm thinking a Fidelity stock index fund as far as the investment goes.


CaptainAlias - I found this on the Fidelity website:
1. Earnings can be withdrawn federally tax-free and penalty-free if the five-year aging requirement and certain other conditions are met. Withdrawals before age 59 ½ may be subject to a 10% penalty on capital gains.

Frankly - "certain other conditions" just confused me more, so I'll keep researching.

Great idea OP! My folks did this for me and I can confirm this was a good way to introduce me to long term savings. Especially since it's such a good deal tax-wise for young folks, my prarents encouraged me to try to earn the maximum ($2K then) doing my summer job or whatever. Then they contributed the full matching amount.

I thought contribution has to be from your earned income
No, it's just limited to that much. You can get the money from where ever you can find it.

Gargame - thanks for the heads up about the index funds. Unfortunately it looks like even the Fidelity Freedom Funds have a 2500 minimum.

If your child is planning to use this money for a car then do not put it in....I am pretty sure you will get fined for early withdrawal.

Will I get taxed for early withdrawal?

When I was 16 (which was 6 years ago) I rode my bike to work for 1.5 years and made minimum wage so that I could afford a 3500 car (my grandparents helped me a bit after seeing my dedication). I am now in a private college or essentially a full ride, and I can't help but think I can only attribute that to the moral building ethics my family instilled in me. If your son likes to spend money, I would make him work harder for it until he realizes how much effort he has to exert to derive the pleasure he takes in spending it. When/If I am a father and I help my children on big purchases, I would much rather have them think I wouldn't help them at all so that they learn to rely on themselves first, then give them a little bonus if they succeed.

$.02

A few clarifications and comments...

The Roth CONTRIBUTION can be withdrawn after 5 years penalty free, not the EARNINGS.

The annual contribution to the Roth cannot exceed the reported earned income. Therefore, Jr has to have real earned income and fill out a tax form in order to be eligible. The actual dollars don't have to come from Jr, they can be a gift from Mom or Dad.

I like the matching fund thing. It's not his money unless it's his money... If he doesn't contribute, a lot of the message is gone, it's just free money. Matching contributions make it his. I like that a lot. If he chooses not to contribute, that's a tough situation. Teens don't always listen the best, so I'm not sure how best to encourage it at that point.

Finally, start early in the tax year, not like I did... I couldn't open a Roth for Db Jr on April 15th online. Scottrade and Schwab were the only brokers I could find that would fund a Roth for a minor, and they didn't allow it done online.

Excellent topic.

debentureboy said: The Roth CONTRIBUTION can be withdrawn after 5 years penalty free, not the EARNINGS.No.

A Roth contribution can be withdrawn at any time, free of tax and penalties.

Earnings can be withdrawn after 5 years free of tax and penalties, but only if, as Fidelity says, "certain other conditions" are met -- the easiest of them being turning 59 1/2. (So, while it's not right that earnings can simply be withdrawn free after 5 years, the 5-year test at least has some meaning to earnings, unlike contributions.)

Money converted from a traditional IRA -- or, presumably, rolled over from a traditional 401(k), as now allowed by the Pension Protection Act of 2006, signed into law a few hours ago -- is always tax-free, and can be withdrawn penalty-free after 5 years.Finally, start early in the tax year, not like I did... I couldn't open a Roth for Db Jr on April 15th online.I'm not sure what you're saying here. The tax year begins on January 1 for virtually all individuals, not April 15. The Roth contribution year runs from January 1 to April 15 of the following year.

My bad. The contribution can always be withdrawn penalty and tax free.

As far as the do it early part, just don't procrastinate until April 15th at 9:00 PM. I tried to open online, and no one would allow it. This year, I'll open it sometime before April 15th, in person at Scottrade or Schwab.