When is it too soon to have your kids start saving for their retirement? The sooner the better, starting a retirement savings account as a teenager instead of a few years after college can lead to hundreds of thousands of extra dollars after a half-century of growth.
Roth individual retirement account
The retirement savings program begins with a Roth individual retirement account and it will need to be a custodial account, with an adult co-signing, if the teenager is under 18. The nice thing about Roths is that you generally pay no taxes on the withdrawals. So the money will grow for many decades and then come out tax-free as long as the rules don’t change.
It can be difficult for teenagers to start thinking about retirement when they are not old enough to do adult activities. How do you put it into perspective?
If that 19-year-old starts with $5,000 and makes the maximum contribution each year until 67, the ending balance is $1,164,985 if it grows at a 5 percent annual clip. That’s over $330,000 more than what someone would end up with if they waited just six years, until age 25, to start the Roth and then saved the same amount.
Families who fear that Roth accounts will interfere with their financial aid packages can rest knowing that it does not interfere with it. Although this is subject to change if many families start putting away their kids money away in Roth accounts.
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