I remember Mardi handing me my first paycheck after a busy Sunday night working at Scooter’s Frozen Custard. On the walk home, I ripped the once unblemished envelope into messy shreds. My eyes sparkled as I saw my name next to an actual wage. To add to the excitement, I knew my next step: opening a Roth IRA account. Roth IRA accounts represent the best action for working teenagers because they offer long-term tax-free growth potential in the form of investment.
A Roth IRA is funded through earned income with a maximum contribution of $6,000 per year. As Tim Kendrick, advisor to the Latin School Investment Fund, mentions “the benefits of Roth IRAs is reducing a younger person’s taxable liability—a tax reduction by being able to put aside money, specifically for retirement.” Here’s an example: imagine you contribute $3,000 for 20 years for a total of $60,000. After eight years in an account that earns a modest $5,000 in interest along with an investment in an index that yields 8%, your money will have doubled to $120,310 without having to pay any taxes on withdrawal (Boyte-White 2021). Moreover, It’s important to start as a teenager because Roth IRA investment returns model an exponential curve. Ed Mahoney, a Latin School Finance in Math teacher, explains: “as time goes on in those early years, your increase is fairly modest, but as more years occur, the increase per time period is a lot higher.”
Furthermore, to take full advantage of the unique tax-free properties of Roth IRAs, it’s important to invest as it allows for greater returns on the money you contribute. There are many different options, but a common choice, especially for high school students with limited knowledge of complex markets, is the S&P 500. Recent studies indicate that “only about 23% of actively managed mutual funds outperform the S&P 500 over five years” (Levy 2021).
In today’s volatile world, it is crucial for teenagers to start a Roth IRA account at a young age and invest in successful indexes to strengthen their financial futures.