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If you have a teenager in your life that is working their first summer job, talk to them about this money strategy.

I remember my first summer job and getting that first paycheck. My dad told me to walk down to the local credit union and put half into a Roth IRA. I did it. I didn't fully understand what I was doing, although he probably explained it to me - it just didn't sink in at the time. Of course, now I really appreciate how good that advice was for a couple of reasons.

Why a Roth IRA is a good option for teenagers

First of all, the money that goes into a Roth IRA is after tax.

It grows and is distributed tax-free (if used appropriately). Making that contribution when your income is really low, like when you're a teenager, perhaps the lowest it will be for decades to come, is smart.

Secondly, you're getting started saving early.

You're giving that money more time to compound.

Setting up a Roth IRA

To set up a Roth IRA, you may have to do a custodial Roth IRA, which is the same as a regular Roth IRA, you will just have a parent or other adult be listed as the custodian until the child reaches the age of majority in their state. So let's say they're 18 or 21 and then it will convert to a regular Roth IRA. Not a big deal, just something to be aware of.

The amount you can contribute to a Roth IRA

The amount you can contribute into a Roth IRA is the lesser of $6,500 in 2023 or earned income. So if they just earned $2,000, that is what can go into a Roth. Especially important to remember if you are willing to gift that contribution for the child. I have clients that will say - keep your summer money and I will gift the Roth contribution for you. Great idea. Just make sure that you know how much the child earned.

There are also income limitations to be able to save to a Roth that you yourself may have bumped into when you looked into it. Most teenagers this is not an issue, but you can talk to your tax person if you have any questions.

I will also put in the description below a link to the IRS site that talks more about the Roth IRA and everything you need to know.

https://www.irs.gov/retirement-plans/traditional-and-roth-iras#:~:text=Roth%20IRA,and%202022%20and%202023%20limits).

So find that teenager in your life soon before they spend all their summer earnings, be a tiny bit nosy - just ask what they're doing with it, talk to them about a Roth IRA, and let me know how it goes.

My name is Linda Rogers, Owner of Planning Within Reach.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.