Your Teenager’s Retirement Saving

Teenagers. Ya gotta love ‘em. It’s like having your own personal Linda Blair around the house. As long as you’ve got to get yourself and your kids through the high maintenance teenage years, you might as well impart some good habits along the way. Like acceptable hygiene. And retirement saving.

When they get that first summer or after-school job, they are going to have a lot of discretionary income—a lot compared to what they need and are used to. So there’s no better time than the teenage years for them to begin the saving habit—setting aside a portion of their working income in a savings bucket of one kind or another. Saving is like playing baseball or doing crossword puzzles or lifting weights or playing guitar—the more you do it, the better you get at it. It becomes second nature. So there’s no better time for a person to learn how to save than when she has her first taste of discretionary compensation.

You might even encourage your kids’ saving habit by subsidizing it. Maybe give them a dollar for every two they put away in a savings bucket, so they can continue to enjoy some of the consumption benefits of their hard-earned income. It’ll be like your own family matching contribution.

So what’s the best kind of savings bucket for a teenager? That’s a no-brainer. It’s the Roth IRA! Teenagers don’t have much income (except for Miley Cyrus) so they usually meet the qualification rules for contributing to a Roth IRA, as described in February 4’s post. And for a teenager, the tax cost of foregoing a deduction (had they instead contributed to a traditional IRA) is very small; maybe even zero. Then the dollars they put aside—and every dollar of investment earnings for the next 70 or 80 years—is totally tax-free. What a deal!

Now don’t you wish you were a teenager again so that you could start your own Roth IRA? When I was a teenager there was no such thing as IRA's or Roth IRA's. Or electricity. Or the wheel.