A\u00a0Roth IRA\u00a0might not be the flashiest way to spend your summer job money, but saving even a small portion of your paycheck could net you huge returns in the future.<\/p>\n
The teen employment rate is expected to be 33.6% for summer 2023, based on Rice University\u2019s recent jobs report. Even more promising \u2014 the median wage for workers in the 16-24 age group was up 11.9% year over year in May,\u00a0 according to the Federal Reserve Bank of Atlanta.<\/p>\n
As you make plans for that summer job money, here\u2019s why you might consider adding a Roth IRA to the list.<\/p>\n
Having a full-time job isn\u2019t required in order to save for retirement. As long as you\u2019re earning money, you can open a Roth IRA at any age.<\/p>\n
And, particularly as a first-gen investor, it\u2019s a great chance to start making your money work for you.<\/p>\n
\u201cThe younger you are, the more time you have to save,\u201d says Luis Rosa, a certified financial planner and founder of Build a Better Financial Future, a financial planning and investment advisory firm. \u201cIf you have the opportunity to start saving now, especially in a Roth IRA, and take advantage of not having to pay taxes on it at a future date, then it\u2019s just a great combination.\u201d<\/p>\n
That benefit of a Roth IRA can also be its drawback: Because money is contributed after-tax, you don\u2019t get any tax deductions now by saving for retirement. Instead, you get to take the money \u2014 and any gains \u2014 out tax-free after age 59\u00bd as long as you\u2019ve held the account for five years.<\/p>\n
But those tax-free withdrawals are why Yanely Espinal, author of \u201cMind Your Money\u201d\u00a0<\/em>and educational director at the nonprofit Next Gen Personal Finance, is a huge fan of the Roth IRA.<\/p>\n \u201cI call it the G.O.A.T. (greatest of all time) when it comes to investment accounts,\u201d Espinal says, referring to the Roth IRA. \u201cAnd specifically for first-gen investors, you\u2019re the first generation in your family to get access to the opportunity to\u00a0build wealth.\u201d<\/p>\n From the archives (June 2021)<\/strong>: How Peter Thiel turned $2,000 in a Roth IRA into $5 billion<\/p>\n If you\u2019re working to save for college tuition and expenses, you might be considering a 529 savings plan instead of a retirement account. When it comes to a\u00a0529 plan versus a Roth IRA, which one wins out?<\/p>\n It depends on your situation and needs, and whether you\u2019re planning to apply for financial aid. Money in a 529 savings plan, owned by either you or a parent, is counted as assets when applying for financial aid, but money in a retirement account isn\u2019t.<\/p>\n \u201cWhen you are a low-income or first-generation student, taking a \u2026 hit on your financial aid eligibility is a big deal,\u201d Espinal says. \u201cThat could be your textbooks for your first semester or a laptop you need all four years.\u201d<\/p>\n And although a Roth IRA is intended for retirement, it\u2019s possible to access your money before age 59\u00bd without paying a 10% penalty.<\/p>\n College costs fall under the category of \u201cqualified distributions,\u201d but there are catches to be aware of. You\u2019ll owe taxes on any investment earnings withdrawn, and the withdrawals will count as income, which could reduce your financial aid eligibility in following years.<\/p>\n Plus<\/strong>: Venmo to roll out accounts for teens<\/p>\n If you decide to open a Roth IRA, there are some things to consider, say Rosa and Espinal.<\/p>\n \u201cThe No. 1 thing you need to understand,\u201d says Espinal, \u201cis how much is it going to cost me to open an investment account? If it\u2019s not free to open, automatic no.\u201d<\/p>\n From there, both recommend a few more factors to think about:<\/p>\n Espinal also advises paying specific attention to the expense ratio, a term for the fees paid to cover a fund\u2019s expenses, such as management and marketing.<\/p>\n \u201cThe expense ratio is an annual cost expressed as a percentage,\u201d she says.<\/p>\n \u201cYou want it to be as close to zero as possible. Compare the costs and fees on a per-year basis across different platforms or firms, and go with the one that is going to allow you to keep the most of your money.\u201d<\/p>\n Rosa also cautions young investors about transaction fees.<\/p>\n \u201cIf there are fees for trading,\u201d he says, \u201cyou might actually churn your account, or trade to the point where the fees are more than any investment return you earned.\u201d<\/p>\n After picking where to open your Roth IRA, the next step is deciding how to invest your money. Rosa is a fan of automating the process where possible.<\/p>\n Set it and forget it<\/strong><\/p>\n \u201cIf you wait until the money hits your bank account to then decide to invest it, there is a chance that something\u2019s going to come up,\u201d Rosa says. \u201cSo if you can automate it to, say, on the 15th and 30th of every month, just make it as if it were a bill. A lot of us are already used to paying for video games and other subscriptions, and do the same for yourself and just automate your investment.\u201d<\/p>\n Consider index funds<\/strong><\/p>\n When it comes to picking what to invest in, Espinal prefers exchange-traded funds, also known as\u00a0ETFs, and index funds, over individual stocks.<\/p>\n \u201cThis gives you automatic diversification,\u201d she says.<\/p>\n Index funds and ETFs are baskets of assets, such as stocks or bonds, that seek to match the performance of a stock market index, such as the Dow Jones Industrial Average.<\/p>\n Rosa says he also recommends funds.<\/p>\n \u201cFind a low-cost index fund that you don\u2019t have to manage yourself and you don\u2019t have to decide what stock to buy and sell,\u201d he says.<\/p>\n Look into fractional shares<\/strong><\/p>\n If you are interested in individual stocks, Rosa suggests exploring whether a brokerage offers\u00a0fractional shares.<\/p>\n \u201cYou might be able to buy big company stocks without having to buy a whole share of them,\u201d he says.<\/p>\n Digging further into what a brokerage offers is a good way to decide which one will offer you the most return for your money, and what\u2019s feasible based on your circumstances.<\/p>\nBut what about 529 Plans?<\/strong><\/h2>\n
What to look out for in a Roth IRA<\/strong><\/h2>\n
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How to invest your Roth IRA<\/strong><\/h2>\n