Fund a Teenager’s Million-Dollar Retirement

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Fund a Teenager's Million-Dollar Retirement

We teach teenagers a lot more about sexuality than we do about money. This can confuse them about what they should be learning. Give this article to a teenager and encourage him or her to start a Roth IRA.

For a $4,300 gift spread out over the next seven years plus a little work on the teenager’s part, you can fund a teenage child or grandchild’s million-dollar retirement. Here’s how it’s done.

Teenagers can contribute to a Roth IRA to the extent they have earned income. Getting earned income does require some work on their part. They need to keep track of everything they earn. The work has to be real, and the income needs to be reported on their tax form. Many young people long to do real work. Our children began doing paid work at age 14.

Earning money is hard work. But it teaches vocational skills that many college graduates still have not learned. Working teaches adolescents to speak standard English clearly so they can be understood. They learn to communicate with adults in a respectful way. They find out how to plan ahead so they arrive at their job on time and prepared to work. On time means five minutes early, not thirty seconds late. They discover how to take self-improvement and learning skills seriously, improving their self-esteem in the process. And finally, they learn to follow both the letter and the spirit of instructions.

The skills and life lessons that teens gain in early work situations can create just as much if not more satisfaction and self-confidence than doing well in school. And the experience will inspire them to put more effort into their education and perhaps value it more too.

But having finally earned some of their own money, few teenagers want to contribute it all toward their retirement, which to them may seem like an unreal event in the distant future. That’s where a parent or grandparent can supply the right incentives. As a powerful motivator, you can offer to fund their IRA with an amount equal to whatever they earn. For example if they earn $615 during the summer, you will give them an additional $615 to fund their Roth IRA. They will work hard to fund their IRA and still have money to spend. It will be well worth the joint family effort.

Contributing $615 each year for seven years and earning 11% will translate to investments worth a million dollars at the end of 56 years. If the process begins at age 14, the value of the Roth IRA will reach a million dollars at age 70.

Starting early makes a huge difference. At the end of the first seven years of saving and investing $615 a year with an 11% rate of return, the portfolio should be earning and reinvesting over $615 per year without any additional contributions. Funding a Roth IRA for 7 years and then stopping actually results in more money than waiting 7 years and then funding it with the same annual amount for the rest of your life. The difference gets more pronounced the longer you delay. Thus contributing $615 between ages 14 and 20 and then stopping is more profitable than starting at age 40 and contributing the maximum $5,000 a year until age 70.

Teenagers are not restricted to $615. The limit for 2012 Roth contributions is $5,000. You must decide how much incentive you can afford to help raise a financially savvy child. Sometimes all the private education and tutoring doesn’t do as much good as practical work experience at helping motivate and empower young people to take charge of their own destiny.

Earning $615 only requires working for 82 hours at the $7.50 minimum wage. There are about 360 working hours during the two-month summer vacation. At $14 an hour all summer, an industrious teen might earn more than the $5,000 maximum Roth contribution. So be sure to determine ahead of time how much you are willing to match before offering the incentive of doubling their pay if they contribute to a Roth.

Offering to match their funding with a gift is generous and provides a great incentive for them to plan and save for their future. But families with less income can mentor their children through the process without matching their contribution. A financial planner can help set up the accounts, manage the investments and explain the principles of the plan.

Contributions to a Roth account are made after paying tax. If your taxable income is less than $8,700, you owe no tax. Therefore your teenager can put money into a Roth account without paying tax on it. All the appreciation is tax free. And withdrawals in retirement, even withdrawals from a million-dollar portfolio, are also tax free.

Contributing to a Roth account while you are young and your income tax rate is minimal is tax-planning genius. This is a rare opportunity to not pay tax on money and put it where it will never be taxed again. Later in life it will be more difficult to contribute to a Roth account as your marginal tax rate rises. Receiving tax-free growth for life is an added perk of funding your Roth account while you are younger.

Much of what is true for a teenager is true for adults as well. Unless you are at the peak of your income-earning potential, funding a Roth might still be brilliant. And leaving a Roth IRA to the next generation is estate-planning genius because it leaves the next generation a tax-free income for life.

Children need practical experience working, earning, saving and investing. Give them all four, and help them fund their retirement in the process. It may just spark the entrepreneurial spirit in the next generation. Can you afford not to?

This article is an update of a January 19, 2004 article.

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.

10 Responses

  1. Anne @ Unique Gifter

    Good concept. I very much like the idea of matching by a mentor. Plus, wouldn’t it be awesome to be 25 and know that you had this solid nest egg already, let alone when you’re 45!

  2. Dave Kretzmann

    I really like the thinking behind this article, despite its dependence on a wildly exaggerated assumption of an 11% average annual rate of return. (Should probably use an inflation-adjusted growth factor of half that amount.) Still, it vividly demonstrates the value of starting a savings program as early as possible.

    Besides the miracle of compound interest, you hint at another important factor in starting early to fund a Roth IRA. Contributions are currently limited or eliminated altogether for high income earners (above a certain AGI). Those contribution limits may well become more strict as our politicians attempt to deal with the national debt by closing “income tax loopholes.” The Roth IRA is such a great deal for Americans that I doubt very much its continuation during the lifetimes of today’s 14-year-olds. So fund your Roth IRA now, while the law still permits.

    • David John Marotta

      Thanks Dave Kretzmann,

      It is always difficult to pick an average return for compounding. We are so psychologically influenced by the latest 10-year period. Anchoring to recent returns, however, is not the most accurate way to look at returns. In the 1990s clients would complain that advisors were using less than the 30% returns in high tech that they had grown accustom to.

      Just to be clear, inflation averages 5% and the stock market averages 6% which is where we get an 11% return. The million dollars in retirement after 56 years of inflation won’t have the same buying power as a million dollars today.

      Here is a nice post on the average return over the past 100 years.

  3. Tony

    I agree – it’s definitely wise to teach kids about finance early on. Once they get a grasp of the basics, at least they can’t be cheated by those big financial institutions.

    • David John Marotta

      Thanks Tony,

      I recommend having enough knowledge to be able to tell when someone is sitting on your side of the table or selling you products and services that aren’t really in your best interests. With or without that knowledge, I recommend NAPFA as the best place to start your search.

  4. David John Marotta

    This post was featured in the Carnival of Wealth, Global Boondoggle Edition. Here is the excerpt from the carnival by Greg McFarlane:

    In our [Greg McFarlane’s] book (available on Amazon!) we bemoan parents’ refusal to discuss money with their kids. Kids get the sex talk, the alcohol talk, maybe even the drugs talk, but never the money talk. David Marotta at Marotta on Money shares our lament, and implores you to stop what you’re doing and at least discuss Roth IRAs with your precious little snowflake.

    Or you can just let your kid take out a student loan to study something useless and then spend decades paying the loan off. Your call.

    We just read David’s bio. We’ll have to check the records, but we’re pretty sure he’s our first submitter to have played chess with Edward Teller. Apparently, the U.S. State Department has a chess team. Also, David’s favorite number is e. We’re big Euler-Mascheroni constant people ourselves.

  5. David John Marotta

    This post was featured in the July, 2012 Carnival of Passive Investing.

  6. David John Marotta

    This post was featured in the Tax Carnival #105: Dog Days of Taxes edition. Here is the excerpt from the carnival:

    David John Marotta says we’re not teaching our teens things that can make a big difference in their lives, such as a Roth IRA. To remedy that, he suggests sharing Fund a Teenager’s Million-Dollar Retirement with young people you know.

  7. Paul

    Your recommendation “Fund a Teenager’s Million-Dollar Retirement” is excellent. The concept is sound. There are a few problems that I have encountered in trying to implement your recommendation. The first is: There are very few jobs for teenagers because there are tons of Federal and State(s) regulations related to Child Labor and therefore most employers are reluctant to hire young teenagers. The second problem is clearly articulated in your article, that being that to fund an IRA requires that the teenager must have W-2 box 1 income and thus must pay the related payroll taxes.
    As you pointed out, starting as young as possible, thus giving more years to compound and keeping the fund in a Roth IRA are critically important. The difference between starting at 14 (the youngest age allowed by Child Labor Law) versus starting at 17 is several hundred thousand dollars at retirement. You also pointed out that working, managing money, and scheduling time (all things that come from real life work experience) are lacking in our schooling, but are critical to adult success.
    I have four grandchildren that I want to help via the Roth IRA method. So I started research on the complexities of the Child Labor Law and related permits, and the IRS’s tests for employment. This turns out to be complex and not friendly. I found that there was no real solution. So If I couldn’t find one and there are thousands of families that could use this, then the logical conclusion is; where there is a need there is a business. As a result we have created 1417Power.
    1417Power offers grandparents, parents, friends, and even companies the opportunity to pay a monthly fee for a teenager to enroll in the 1417Power program. The teenager performs tasks (training first) in market research (the 14 through 17 year old population influence over 200 billion in annual consumer spending). We have structured a complete program that allows participation on a month to month basis with a fee ranging from $200 to $875. For detailed information please visit

    • David John Marotta

      Greetings Paul,

      Although many feel-good laws make youth unemployment difficult, I would not let that stop you from helping your own children. Although 14 is the youngest age for non-agricultural work, there are enough exceptions for the free market to still be somewhat free. Youth of any age may deliver newspapers; perform in radio, television, movie, or theatrical productions; work in businesses owned by their parents (except in mining, manufacturing or hazardous jobs); and perform babysitting or perform minor chores around a private home.

      Please notice the exception to working in businesses owned by their parents. So start a business. Run it for profit. Incorporate or use Schedule C. Go ahead and pay the employment tax because that’s the way to fund a Roth IRA. The youngest family business employee that the IRS lost their challenge in a court case was 6 years old. The court ruled that the six year old was doing real work and being paid real wages.

      Normally I delete uninvited links to other sites, but 1417 Power is interesting and directly on the subject matter of the post. Thanks for sharing it.