Should Your Teenager Open A Roth IRA?

Many parents are concerned about how to prepare for their kids’ financial futures.  This apprehension is usually in the context of college savings or estate planning, however, some parents are also concerned for their children’s retirement.  Oftentimes, parents ask: “Should a teenager open a Roth IRA?”

Because of compound growth, the earlier you save for retirement, the better.  The tax benefits of a Roth IRA for kids can be great because you pay taxes on your contributions, not earnings or withdrawals.  Thus, helping your children start a Roth IRA in their teenage years can help them enormously down the road, especially since there is no minimum age for opening a Roth. 

Despite the advantages, opening a retirement for a minor can be tricky as there is a separate set of considerations from the ones you would use to open your own.  Furthermore, to be eligible to open a Roth IRA, your children must earn some taxable compensation income, and the yearly contributions to their account cannot exceed what they earn. 

Although creating a Roth IRA for your teenager is not very common, it can be a great way to instill financial independence early, specifically by making them responsible for their contributions. 

See Matt Shapiro, Is It A Good Idea For Teens To Open A Roth IRA?, Forbes, Dec. 18, 2014.