Your teen’s summer jobs could be their first million

Few things are as much a part of growing up in America as getting a summer job. And here's why most agree a summer job is a good thing to have as part of your coming of age:

  1. You get a good introduction to the rest of your life, which more likely than not will involve a job — working for someone else. You learn about being on time, maintaining quality standards, and the many nuances of employment that can never really be taught in school.
  2. It's usually an eye-opener to the reality adults live with, i.e., the need to get along with coworkers who aren't family and yet have control over your life in ways that often are uncomfortable. You also learn that every job usually has rules you have to follow, even though they may appear to be irrational or unduly strict.
  3. It's a terrific opportunity to get a feel for different types of careers too. Do you like retail or construction, being a park ranger or an accountant? Summer jobs can help you make more informed career choices and, therefore, make better decisions about college education.
  4. But, for most kids, the number one reason to get a summer job is … the money!

At Get Rich Slowly, we know that saving or investing for the future is essential. But since the days where teens were enlisted to work the harvest, few generations have had such a unique opportunity to secure their future. These days, using the same investment method available to their parents, teens are uniquely positioned to make at least $150K from their summer jobs during high school and more than a million if they continue to work and save modestly on through college.

I don't think anybody keeps statistics on these kinds of things, but my guess would be that more than 90 percent of summer job workers do not even give the question of whether they should deposit part of their income into an Individual Retirement Arrangement (IRA) a single thought.

Should they?

Just For Fun

I thought it would be interesting to check. So I asked a few kids in my neighborhood (totally scientific, I know): “Hey, do you think you should put part of your summer pay into an IRA?”

Most of them looked quizzically at me, like I was speaking a foreign language or I had just returned from a mission to Pluto.

Not one even knew what an IRA was! Not a single one! I had to explain it as simply as I could. Once they understood that it entailed giving up some of their hard-earned pay, none even wanted to know what an IRA is. My guess — and it is just a guess — is that anything separating them from their money which doesn't involve immediate gratification is just unspeakably evil.

Another wild guess: Their parents did not sit them down and tell them how wonderful a Roth IRA, or any form of savings, can be.

I then asked a parent or two if they knew whether their kids considered putting some summer job pay into an IRA. Given my discussions with the teenagers I spoke to, I had a suspicion as to what their parents' answers would be, and they didn't disappoint: Not one even considered mentioning the option to their kids. (I think it's because they never did it growing up.)

They were as surprised as the kids at the very notion of opening an IRA at such a young age. “Is it even possible?” asked one of the parents.

Good question.

Age (and Other) Qualifications for IRA Accounts

There is no minimum age qualification to open either a traditional or Roth IRA. All your teenager needs is taxable earned income. (In other words, rich kids earning dividends and interest on trust funds do not qualify.)

Taxable earned income includes wages, tips, and earnings from self-employed income. (Read that as: lemonade stand, paper route, babysitting, etc.) There is a limit to the amount they can contribute to an IRA, and that is the amount of income they earned. (In other words, they can't earn $1,000 and put Grandma's gift of $3,000 into an IRA.)

There is another qualification which might not appear obvious at first glance: In order to open an IRA, your teen has to file a tax return.

Filing Tax Returns

If the notion of a teen filing a tax return fills you (or them) with dread and unprintable language, think again. Technically, your teenager doesn't have to file a tax return if she or he earned less than the standard deduction for singles ($6,200 in 2014, $6,300 in 2015). Not too many summer jobs pay that much, which is why filing taxes rarely falls within the orbit of pre-adults … and everyone seems happy about that.

However, teenagers may actually benefit from filing taxes individually for several reasons:

  1. If their employer pays (and deducts) payroll taxes (e.g., if they use a payroll system), chances are there might be a tax refund waiting for them if they file. And that's just cash in their pocket … but they have to file.
  2. What better way to educate your children about the other of the only two sure things in life than by teaching them with hands-on experience? Most people learn best from doing, and helping kids file taxes while they are still in the home could be a valuable experience for them (especially if refunds are involved).
  3. It might not be the most efficient reasoning, but learning to file taxes at an early age also brings home the value of tax-advantaged investing (things like an IRA or 401(k) plan). Anyone who has filed a tax return has looked longingly at that money and wondered, “Hmm… Is there a way I could keep a little more of that for myself?” Until they have asked that question, it's not likely they will really grasp the benefits of tax-preferred retirement investment plans. In turn, that might very well become a reason why they wait too late to get started.

Whichever way you look at it, getting your child to file their taxes has more benefits than most people think. Oh, and then there's the benefit of being able to put a little money away into a Roth or traditional IRA.

Why would that be such a good thing?

How Summer Jobs Can Amount to a Million Dollars

If we're talking summer jobs for high schoolers, it's probably fair to assume that your teenager will not be paying much in the way of income taxes. Therefore, a Roth IRA seems the obvious choice because the contributions are made after tax — and the withdrawals in retirement are tax-free.

Let's use that assumption and see how the math works out. If your son or daughter works three months for each of their four high-school years, and they deposit $250 per month in an IRA (i.e., $750 per year) — and assuming the money is invested in a simple S&P 500 low-cost index fund — when they reach retirement age, the balance will amount to $150,000! Now, in my book that is making high school pay!

And because it's from a Roth IRA, that amount is tax free!

Odds are any given teen will squawk that $250 a month is a big chunk out of what they make. But just look at how big it becomes when they reach age 65 (again, tax-free).

Should they add similar, modest contributions from their earnings in college, it can easily put the terminal value over a million dollars — tax-free. (I can't help repeating that!)

The Extraordinary Power of Compounding

How does such a small amount ($250 per month for three months, done only for four years) accumulate to $150,000? It's called the extraordinary power of compounding, interest on interest. The miracle of compounding requires time more than money, and isn't that exactly what teens earning entry-level money have?

If someone had told me this when I was working high school summer jobs, I cannot imagine how much better off I would be today. If parents would take the time to explain just this one simple concept to their teens, how much better off will those kids be?

What plans do your teenagers have for their summer-job income? Have you discussed opening a Roth IRA with your teen? Is this doable in your teenager's situation?

More about...Investing, Retirement

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lmoot
lmoot
4 years ago

I’ve worked since I was 15 and while I didn’t contribute to a retirement account until I graduated college (I was focused on saving for my 1st car!), my family always talked about saving for retirement and how important it was and so it was ingrained in me so that when I got my first big person job, I really didn’t have a choice but to save towards retirement (up to the match). I did have a ROTH with a few thousand dollars in it from my grandparents that I didn’t do anything with, but I hope to begin contributing… Read more »

Hannah
Hannah
4 years ago

I worked food service jobs in high school and college. I definitely didn’t consider putting anything into retirement savings. That was my food, clothes and entertainment budget. Once I got my first full time internship where I was making more money than was reasonable to use just as pocket money, that’s when I began researching personal finance. I opened my IRA at 19 (sophomore in college). Six years later, it has grown a lot and I’m definitely glad I opened it so early, but I certainly don’t think I needed to start earlier by putting money from part time jobs… Read more »

Laura
Laura
4 years ago
Reply to  Hannah

I admit I’m in your camp on this one. While I get William’s point about how amounts that seem small to a gainfully employed adult that are contributed early on will build up tremendously, $250 is a HUGE chunk of change to a high-schooler with a summer job. This is like telling someone who makes $5000/month (and uses that money for expenses, though probably not rent) to contribute $3800 of that into a retirement account each month. I would also note that many of the teens I know use their summer jobs to at the very least pay for things… Read more »

Another Beth
Another Beth
4 years ago
Reply to  Hannah

I agree with both of you. When I was in high school and college, I worked year-round to pay for tuition, books, clothes and transportation. If I had even $20 left at the end of the month, I was thrilled. While I get that one can and should save even a small amount, it’s hard to do in practice when you need every penny today.

Tina in NJ
Tina in NJ
4 years ago

We have one kid just shy of college graduation and one about to start 8th grade. Once the older kid has what he calls a “big boy job,” we are considering getting him into a Roth, with the Bank of Mom and Dad doing some sort of match, maybe 50% match on the first so much money for the first year. We haven’t finalized details, but it would be limited. The idea is to get him in the habit of saving. Right now, he’s got a leased car and credit card debt. The key is that he can’t touch any… Read more »

lmoot
lmoot
4 years ago
Reply to  Tina in NJ

Well he wouldn’t be able to touch the ROTH until at least 5 years of contributions…hopefully by then the debt will be gone and he’ll have gotten the knack of saving. That way he has at least one tax sheltered retirement account. If you wait longer to do a ROTH he could out earn the limit (which wouldn’t be a bad thing).

Tracey
Tracey
4 years ago

Wondering what if any, implications a teenager with a Roth IRA in their name has on college financial aid? How much is this weighed against them if at all?

Susan
Susan
4 years ago
Reply to  Tracey

I don’t know about on the CSS Profile, but on FAFSA, their retirement assets are excluded.

Alexandra @ Real Simple Finances
Alexandra @ Real Simple Finances
4 years ago

As a child I was always told about the benefit of saving money, but not about saving in a retirement fund. This is a really great idea.

econobiker
econobiker
4 years ago

That is provided the Roth ira doesn’t get put in place during a down market. I set up a college ira (limited to max $500/year contribution at the time) for my newborn in 2000 and 2001. We didn’t get back to the original $1000 level until 2007- six years later.
Compounding, yeah right…only if the market goes up and the money managers are worth a hoot.

Alex
Alex
4 years ago
Reply to  econobiker

That’s why dollar cost averaging is a thing

Susan
Susan
4 years ago

When my college-aged son was with his current company a year, they offered him enrollment in their 401k with a 4% match. His father and I convinced him to go in for 10% (he doesn’t really NEED the money right now – it’s mostly for pizza and beer). In 8 months, he’s accumulated $1000. He is the only one of his friends with a 401k.

Brett
Brett
4 years ago

Love this idea! My plan was to plan some sort of incentive to match dollars into the Roth IRA. So if he put half of his earnings in and had the rest to spend I would put in the other half. This would allow him to maximize the opportunity, but give him the benefit of working for the summer – pocket cash. Also would want to have some stipulation about not withdrawing the principal or at least until a given age.

Linda Vergon
4 years ago
Reply to  Brett

Hi Brett,

I think your incentive match is a great idea for aunts and uncles and grandparents too. Incentivize what you want to encourage!

Regards,

Linda Vergon
Editor of GetRichSlowly.org

Bryan@Just One More Year
[email protected] One More Year
4 years ago

My father started a tradition in our family that I have carried on with my children. When we were in our early twenties he helped us setup IRAs in our name. He made a deal that he would add $3,000 himself over 3 years. The first year he would put in $1,500 and we put in $500, next year $1,000 each, and the final year he puts in $500 and we put in $1,500. At the end of 4 years we would have $6,000 saved. I continued this tradition with my daughters and actually opened up accounts for them at… Read more »

Ed
Ed
4 years ago

I have 4 kids. I have offered each of them the same deal. When you get your first job, usually at age 16, I will match 50% of what you put into your Roth IRA. Putting money in the company 401(k) to the match was already going to happen when they qualified, usually after a year of employment and/or at 18 years of age depending on the employer. So that usually took awhile. I would explain to them the importance of starting early, compounding, TAX FREE, etc. etc. sometimes it sunk in, sometimes I’d get blank stares like I’m never… Read more »

Scondor
Scondor
4 years ago
Reply to  Ed

Charles Schwab lets you open a custodial Roth with as little as $100, no fees, no direct deposit, etc. My 3-year old daughter has $120 in hers that she earned from sorting and recycling the family’s cans/bottles/plastic bottles. They have an index fund that has no buy or sell costs, with a 0.09% expense ratio. At 8%, a 5 cent bottle will probably be worth about $5 when she’s 65, so without putting another cent in, that’s $12,000.00. From an anklebiter’s perspective, she just likes sorting stuff into different bins because I give her a Princess Elsa sticker or a… Read more »

Ed
Ed
4 years ago
Reply to  Scondor

Thanks for the tip. I’ll look into Charles Schwab.

Chef @ Fry The Financial Fish
Chef @ Fry The Financial Fish
4 years ago
Reply to  Ed

Thanks Ed- it is good to hear from someone who has actually done this. Unlike this author who is talking about it but does not sound like he has gone thorough the process of setting one up. I definitely plan opening up Kiddie Roth’s when my children are old enough to have a job with earned income. I probably will use the contributions as a flat out gift to them – the nicest thing is that they can see the power of compound interest over time without being able to touch the gains until they get older. I highly doubt… Read more »

don
don
4 years ago

Nice article. You can see a similar one at: http://familyshare.com/money/your-kids-30000-summer-job

cynthia
cynthia
4 years ago

I think I have read that it is possible for a parent (or other relative) to “match” the teens earnings in the Roth. For example, if the teen earns 2K over the summer, I thought that the parent could just donate 2K and put it in the Roth for the child. This would seem to be the way to get the most power of compounding. I did not realize that Lemonade Stands would count. Now, I am wondering how young you can be to contribute to a Roth?

Ed
Ed
4 years ago
Reply to  cynthia

I don’t think there is an age limit. There are two things to consider:
1) the maximum amount you can contribute and for 2015 it is $5,500 for <50 years old
2) there has to be earned income to match that amount (or more). So you can put in the $5500 yourself for your child but they have to have at least that much in earned income (they can't make $2k and a total of $3k is put in).

Tolu Idowu
Tolu Idowu
4 years ago

I would advise teenagers to work during their summer vacations like this article promotes , but during school periods they should focus basically on school not work and should only work if that is the only way they will be able to afford their school fees. Work will only distract them, and their performance at school will pay a price. Most people that work and school at the same time do not perform well in school. They are teenagers let them be teenagers.

Marie
Marie
4 years ago

I was required to turn over my summer job paychecks to my parents to be put towards the cost of college. I made a pittance compared to the overall price, but it was to make a point. I didn’t have money of my own to start an IRA until I graduated and moved out.

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