Wealth Finance

Apparently looking to scrape up all the tax dollars it can, the IRS sent out a reminder this morning that kids with summer jobs have to pay taxes on their income, including things like tips.

While this may be unwelcome news to the youthful worker, it also presents a rare opportunity for him or her to get a big jump on saving for retirement. (Probably the furthest thing from the average teenager’s mind, we realize, but someday they’ll thank us… maybe.)

For example, if a 16-year-old earns $1,000 over the summer and invests an equal amount in a Roth-IRA, by the time he or she is ready to retire in half a century, that $1,000 would be worth close to $11,500. (We’re assuming relatively modest 5 percent annualized growth.) And, unless the laws change, all that money will be tax-free.
Finding a no-load mutual fund or other worthy investment that will accept an initial contribution of less than $2,500 or $3,000 can be an obstacle. But they’re out there. For example, Charles Schwab’s minimum for a custodial IRA account is $100, and T. Rowe Price has a  $1,000 minimum for its IRAs. As we noted in this earlier article on retirement planning for young investors, many mutual funds will even waive their minimums if you commit to making regular, automatic investments.

In case the youth lucks into a well-paying summer job, the current maximum Roth IRA contribution is $5,000, for anyone under age 50.

—Greg Daugherty

Greg writes the “Retirement Guy” column each month in our Consumer Reports Money Adviser newsletter.

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