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Roth IRAs can be key for teens working in the hot summer job market

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Over the years, fewer teens have sought summer jobs, preferring instead to bolster their college applications with academic programs or unpaid internships. But as the economy recovered from the pandemic, employers were almost begging for workers, and some opportunities were too good to pass up.

With more flexible work arrangements and better pay, the proportion of teenagers working in the summer has jumped.

According to Ed Slott, CPA and founder of Ed Slott and Co, this gave young workers a rare opportunity to get a valuable head start on long-term savings.

“The greatest commodity that makes money is time,” he said.

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A strong summer for teenage employment

in general more than 6 million teenagersor 36.6%, had a high-paying job for at least part of last summer, marking the highest level of summer teen employment since 2008, according to a Pew Research Center analysis of U.S. Bureau of Labor Statistics data.

Economists predict otherwise strong summer for employment of teenagers in 2022. Already approx 5.5 million As of May, people between the ages of 16 and 19 were hired, according to a Pew report. (July is usually the peak of youth employment.)

And wages are still growing. Average hourly wages for teenagers rose five times faster than average wages for all workers in the first few months of the year, with 15- to 19-year-olds growing by 4.1%, compared to wages for all age groups at 0.8%. , according to data from the Gusto platform.

How to make the most of your summer earnings

Slot recommends opening a Roth Individual Retirement Account to get a head start. Since there are no age restrictions, anyone with earned income, say from a summer job, can contribute.

Even if the teen only saves a portion of the money, parents can add funds on behalf of their child as long as the total does not exceed the teen’s earned income for the year.

Also note that for 2022, the maximum IRA contribution limit is $6,000.

For example provided by certified financial planner Stacey Francis, president and CEO of Francis Financial in New York City: If your teen earns $2,000 at the local ice cream shop over the summer and saves half of that in their Roth IRA, parents can contribute up to $1,000 more to an investment account for a total of $2,000.

Even if no one else has contributed, it remains to connect that initial $2,000 contribution can grow significantly over the course of your child’s working life. Assuming an average annual return of 7% over a 50-year period, $2,000 invested at age 17 could grow to more than $65,000 by the time you retire at age 67.

“You don’t want to leave anything on the table,” said Slott, who opened a Roth IRA for his daughter when she got her first summer job at age 15. retirement savings”.

If retirement seems too far away, account holders can withdraw their contributions at any time without tax or penalty if, for example, they need money for college or down payment on a house along the way, according to Slott. Think of it as a “tax-free emergency savings account,” he said.

“It removes that barrier in your mind that you have to wait until 59½.”

Meanwhile, like the investment, all interest, dividends and growth on those assets will accumulate over time. “Roth money will never be reduced by current or future taxes,” Slott said.

It’s also a great teaching tool to emphasize the “long-term value of savings,” he added.

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