<p>I overheard my co-worker talking about how her kids starting putting money into an IRA at age 16. My teen daughter is so disciplined that she puts 90% of each paycheck into savings (obviously she doesn’t have many expenses right now 
and I figure she would be interested in investing some of it. Any recommendations?</p>
<p>Keep in mind that in the financial aid process 35% of all assets in your child’s name is to be contributed toward their EFC in addition to your EFC.</p>
<p>IMHO, the biggest advantage of an IRA is its tax advantaged status. But this is balanced by restrictions on accessing the funds (10% penalty).</p>
<p>IMHO, anyone advocating an IRA for the young probably does not understand the tax issues. A rational approach would have a kid saving in a post tax account until they have a basic stash of ready cash for emergencies, THEN begin saving for retirement. The tax savings, at their low earning level, just isn’t bait enough compared to the prospect of a 10% penalty (and possibly paying regular tax at a higher rate.</p>
<p>There are just too many problems that could arise that would tempt a young adult to raid the IRA, losing quite a bit in the process.</p>
<p>If you are paying full freight, anyway, your daughter may consider a Roth IRA.
The advantages compared to some previous IRAs is that you may withdraw funds for some expenses (education, house-buying) without penalty. Note that the Roth amount is not deducted from your taxable income at the time of purchase.</p>
<p>My son’s AP econ instructor was quite high on Roth IRAs for teens, and he really made a believer of my son.</p>
<p>Our 20 year old opened a Roth IRA 2 years ago with earnings.
$1000 has turned into about $1400 in a plain vanilla index fund.</p>
<p>It’s not money he thinks about or has plans for. I think it might help with a down payment on first house down the road.
He keeps some savings (few hundred) in an INGdirect account online earning 4.35% and a free local checking that he accesses with debit card. He’s VERY responsible with HIS money…as opposed to when it was MY money he was spending.</p>
<p>D1 established her first Roth IRA this past yr. Out of sight, out of mind. All in all, a great investment.</p>
<p>My S has first “real” job this summer and will be investing all his earnings in a Roth IRA to get the feel for retirement saving. You can never start too soon. With only merit aid for college, savings in his name is not an issue. </p>
<p>I started IRA’s for my nephews when both graduated from college a few years ago because I am firm believer in saving early for retirement. You have the benefit of time, something kids right out of college don’t realize.</p>
<p>The biggest argument in favor of investing in an IRA (regular–pay taxes later–or Roth–put in taxed income and never pay taxes again) is time. Someone who puts in the maximum for starting at age 16 will have roughly double–or more–what someone who starts contributing at age 26 will have.</p>
<p>D’s AP econ teacher also was pro Roths for teens. D started hers last year, and will continue to deposit into it throughout the years. One of the kids in her HS class started when he was barely making anything, and continues to put in every month. At his rate, he estimates 2.5 million at retirement, and he isn’t putting in a huge amount! Well worth it. The longer the $ stays in, the better. Can’t recoup those lost years of compounding interest.</p>
<p>Let us start with some real numbers. Let us say you want $1,000,000 at age 60 (you are 20 now). You would need to save $4,000/yr (the max IRA limit) at after tax return of 7.5%.</p>
<p>If you start saving at 25 - you need to save $5,000/yr
If you start saving at 30 - you need $8,900/yr
If you start saving at 35 - you need $13,700/yr</p>
<p>Play with your own numbers @</p>
<p><a href=“Bankrate: Guiding you through life's financial journey”>Bankrate: Guiding you through life's financial journey;
<p>newmassdad makes a good case against the traditional IRA, but I think a Roth IRA is a great option for a teen. The one unanswered question I have, would a Roth IRA in a teen’s name count against them in financial aid calculations the same as a savings account would? Seems counterproductive if withdrawals were forced to pay for college, incurring penalties.</p>
<p>IRAs don’t apear in Fin Aid calculations.</p>
<p>When you are young, you should spend you money. Sure, if you keep saving you might have a million when you are 60. Too bad you will be too old to enjoy it!</p>
<p>Either choice (roth or traditional IRA) works. It’s simply time or money, which do you more of? </p>
<p>The Roth would be ideal for kids who aren’t earning enough to worry about tax bracket bingo. A traditional would be better if they were earning enough to pay into the gov tax system. </p>
<p>I would not fault anybody who saved either way. Instead I would congratulate them for doing something in the right direction. Saving is not an exact science and there is no absolute correct way to do anything savings wise… outside of the habit of saving.</p>
<p>Could someone in the know clarify this for me? Can money that doesn’t “show up” as taxable (i.e. babysitting $) be put into an IRA? If the money is in a child’s IRA, does that figure in finanacial aid equations?</p>
<p>No…to have an IRA you have to have ‘earned’ income (with W2) and you can not put more than you have earned.</p>
<p>“When you are young, you should spend you money.”</p>
<p>That certainly is one form of living.</p>
<p>Our S also has had a Roth IRA for a while now (almost since he started having summer earnings). While we don’t qualify for need-based aid, it was my understanding that IRAs are not considered, even in child’s own name, as one poster stated above.</p>
<p>While you might look at an IRA for a young person as “risky” because they might “need” to take the money out, I think it’s never too soon to teach a kid the full overview of how to handle finances. This means (1)spending wisely and within their means (2)saving for short term wants -eg, expensive electronics(3)saving for long term needs-college, retirement, home purchase. This means learning early that you put some $$ aside not to be touched, other for those “emergencies” where you might have to tap your savings. IRA/Roth IRAs are a great way for them to learn about different types of savings.</p>
<p>You can have earned income without a W2. Parents can pay their kids for work in a family business (which doesn’t have to make money) and not have to pay SS until they turn 21. You can do an income tax return and declare the income that way. Your Roth IRA requirements are based on report adjusted gross income (AGI) on your income taxes. <a href=“http://turbotax.intuit.com/tax_help/TaxDeductionsAvailableforFamilies.html[/url]”>http://turbotax.intuit.com/tax_help/TaxDeductionsAvailableforFamilies.html</a></p>