Have you earned any income in 2009? It could be from the local pizza place, the American Eagle in your mall, or even the cash you received for walking the neighborhood dogs. If you do, there’s a great place to put part of it.
The place is called a Roth IRA. IRA stands for Individual Retirement Account. It’s named after William Roth. What’s so great about it?
What’s awesome is that they allow your money to grow to enormous sums. If you put $2000 a year in a Roth IRA from age 15 until 60 and the market returns 9%, (entirely possible over a period of 45 years by the way) you would have over a million dollars. That’s sick isn’t it? I may be geeky, but that seems really exciting. Even better, you can take this money out when you retire without paying a cent in taxes.
Another bonus for teens: You don’t have to pay income taxes unless you make over $8,950 a year. Since most teens never come close to this, it means that any money you contribute to a Roth IRA will never ever be taxed by the government.
But I don’t have two thousand dollars! What am I going to do?
It doesn’t matter. Open one up anyway. You don’t have to contribute two grand if you can’t or just don’t want to. What’s important is that you open it and put something in. In the future, when you get a “real” job you can start contributing a lot more. But there’s no time like the present and every year you wait, will cost you money. Not just a little money, but a lot of money, as in thousands of dollars.
What’s the Catch?
There aren’t too many disadvantages to a Roth IRA, but keep in mind:
The money you contribute has to be earned. This means you can’t just put in money you got as an allowance. If your parents are really generous though, they can contribute whatever amount you’ve earned and then let you “keep” your money in a savings account or even in cash. You might try to see if they’ll match your contributions. Example: “Mom and Dad, I’ve earned $1000 from mowing lawns this summer. I’d like to keep part of that money to use during the year, but I was wondering if you would contribute $500 if I put in $500.”
Also, you can’t access your earnings until you’re 59-1/2. This shouldn’t be a problem though because the point of this account is to save for retirement. This is not the account you use to save for a car.
You need to have proof you earned your income. This typically means filing a tax return. I know this sounds scary at first, but don’t worry, it’s really easy. I’m planning to write an article on how to file your taxes by the end of February.
If you aren’t 18 yet, you’ll need one of your parents to be the custodian on the account. This is because minors can’t legally enter into financial or contractual agreements by themselves.
Even with these requirements, the Roth IRA is a great way to prepare for your future. You’re young. You have a huge advantage over older people who never opened one. Use it.
Tomorrow, check back for: Where and How Do I Open a Roth IRA?
