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Roth IRAs May Be Key for Teen Workers in a Hot Summer Job Market


For years, fewer teens sought summer jobs, opting instead to bolster their college candidacies with college programs or unpaid internships. But as the economy recovered from the pandemic, employers were nearly begging for workers and some opportunities were too good to pass up.

With more flexible work arrangements and better wages, the share of teens working in the summer has jumped.

This gives young workers a rare opportunity to get a head start on long-term savings, according to Ed Slott, CPA and founder of Ed Slott and Co.

“The greatest asset to making money is time,” he said.

Learn more about personal finance:
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A strong summer for teen employment

Overall, more than 6 million teens, or 36.6%, had paid employment for at least part of last summer, marking the highest summer employment rate for teens since 2008, according to a Pew Research Center analysis of US Bureau of Labor data. Statistics.

Economists are predicting another strong summer for teen employment in 2022. Already, around 5.5 million 16-19 year olds were employed in May, according to the Pew report. (July is usually when youth employment peaks.)

And wages continue to rise. Average hourly wages for teenagers grew five times faster than average wages for all workers in the first few months of the year, recording wage growth of 4.1% for 15-19 year olds, compared to a wage growth of 0.8% across all age groups, according to data from payroll platform Gusto.

How to make the most of your summer income

Slott recommends opening a Roth Individual Retirement Account to get a head start. Since there is no age limit, anyone with earned income, such as a summer job, can contribute.

Even if a teen only saves money, parents can add funds in their child’s name, as long as the combined amount does not exceed the teen’s earned income for the year.

Also note that there is a maximum IRA contribution limit of $6,000 for 2022.

In an example provided by Certified Financial Planner Stacy Francis, President and CEO of Francis Financial in New York: If your teen makes $2,000 at their local ice cream shop over the summer and saves half in his Roth IRA, parents can contribute up to $1,000 more to the investment account for a total of $2,000.

Even if no one has ever contributed again, the additional $2,000 contribution could increase significantly over your child’s working life. Assuming an average annual return of 7% over a 50-year period, $2,000 invested at age 17 could grow to over $65,000 by retirement at age 67.

“You don’t want to leave anything on the table,” said Slott, who opened a Roth IRA for her daughter when she got her first summer job at 15. “They now have this opportunity with a dollar to start tax-free retirement savings.”

If retirement seems too far away, account holders can withdraw their contributions at any time without taxes or penalties if, for example, they need money for college or a down payment on a house further afield, according to Slott. . Think of it as “an emergency tax-free savings account,” he said.

“It removes that barrier in your mind that you have to wait until 59½.”

During this time, the investment and all interest, dividends and growth on these assets will accrue over time. “Roth’s money will never be eroded by current or future taxes,” Slott said.

It’s also a great educational tool for emphasizing “the value of long-term saving,” he added.

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