Amelia, 16, is starting her first part-time job this year. Amelia’s parents would like to get her to start forming good financial habits and into the habit of saving for the future. So they asked their tax advisor for the most tax-advantaged options. Their tax advisor suggests a Roth IRA, which can be perfect for teenagers because they likely have many decades to let their accounts grow tax-free.
Roth IRA contributions are not deductible, but if Amelia earns no more than the standard deduction for singles ($12,000 for 2019) and has no unearned income, she will pay zero federal income tax anyway. So the tax-free treatment of future qualified distributions will be well worth the loss of any current deduction.
If Amelia doesn’t want to invest too much of her hard-earned money, and if her parents are feeling generous, they could give her the money to contribute. For example, if Amelia earns $6,000 for the year, her parents could give her, say, $5,000 so she could contribute the full $6,000 she is eligible to contribute, if she contributes $1,000 of her own earnings. This would still leave her with the $5,000 to spend as she wishes (or save for a shorter-term goal) and on her way to establishing good saving habits.
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