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Teenagers’ retirement may seem too far off to warrant saving now, but IRAs can be perfect for teens because they’ll likely have many years to let their accounts grow tax-deferred or tax-free.

The 2015 contribution limit is the lesser of $5,500 or 100% of earned income. A teen’s traditional IRA contributions typically are deductible, but distributions will be taxed. Roth IRA contributions aren’t deductible, but qualified distributions will be tax-free.

Choosing a Roth IRA is typically a no-brainer if a teen doesn’t earn income that exceeds the standard deduction ($6,300 for 2015 for single taxpayers), because he or she will likely gain no benefit from deducting a traditional IRA contribution. Even above that amount, the teen probably is taxed at a low rate, so the Roth will typically still be the better answer.

How powerful can an IRA for a teen be? Here’s an example:

• Both Madison and Noah contribute $5,500 per year to their IRAs through age 66 and earn a 6% rate of return.
• But Madison starts contributing when she gets her first job at age 16, while Noah waits until age 23, after he’s graduated from college and started his career.
• Madison’s additional $38,500 of early contributions results in a nest egg at full retirement age of 67 that’s nearly $600,000 larger than Noah’s — $1,698,158 vs. $1,098,669!

Contact Whalen & Company for more ideas on helping teens benefit from tax-advantaged saving.

Copyright 2015 Thomson Reuters

Image courtesy of MisterGC at FreeDigitalPhotos.Net

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