Can my 17 year old grandson invest in a Roth IRA?

Dear Penny,

My 17 year old grandson works after school and puts half of his salary in a savings account. His grandfather and I prepaid his tuition, so he won’t have big expenses there.

I would like him to invest in a Roth IRA. By doing so, he would not be tempted to withdraw the money. He will be 18 in June if that is a requirement. Is this a smart thing to do?


Dear J,

In theory, this is a great idea. The big advantage of a Roth IRA is that you pay up-front taxes on the money you invest in exchange for unlimited tax-free growth. Since your grandson is 17, I’m guessing he doesn’t have a big tax bill. If he has the discipline not to touch that money for four or five decades, even a small amount invested now could pay off hugely in retirement.

But this part bears repeating: your grandson should be prepared not to spend that money for several decades. That’s a big ask for a 17-year-old.

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Before we go any further, let me explain the rules: anyone can fund a Roth IRA as long as they have earned income for the tax year, i.e. money earned by working. Age is not a factor. The classic example here is that even baby Gerber could open a Roth IRA.

Your grandson could contribute up to $6,000 or his total earnings (whichever is less) for 2022. In 2023, the limit increases to $6,500.

Because your grandson is a minor, he would need a keeper Roth IRA. He would own the money, but an adult would have to make the investment decisions. Once he reached the age of majority — between 18 and 21, depending on the state — he would have full control over the money.

Keep in mind that just because the money is invested in a Roth IRA doesn’t mean your grandson won’t be tempted to spend it. He could withdraw the contributions (but not the earnings) at any time. With the winnings, he would pay a 10% early withdrawal penalty, plus income taxes on withdrawals before age 59½. But taxes and penalties may not be a huge deterrent when it feels like retirement is a lifetime away.

If you’re going to encourage your grandson to fund a Roth IRA, be sure to follow through with some advice. A good place to start is to talk about short, medium and long term financial goals.

Buying a car or saving money for college are examples of short-term goals. A medium-term goal might be to buy a house after college or pay for college. But the money he invests in a Roth IRA is for a long-term goal, which is his eventual retirement.

It is possible to use a Roth IRA for short-term goals, which is a frequently cited benefit of this account. For example, you can withdraw up to $10,000 of income for the purchase of a first home without paying taxes or penalties. You can also use the earnings for higher education and avoid the typical 10% early withdrawal penalty, but not taxes. This flexibility is nice, but when you use the money for short-term goals, you don’t lock in the true power of the Roth IRA, which is unlimited tax-free growth.

Additionally, you make money with a Roth IRA by investing in the stock market. Generally, you don’t want money invested in stocks if you’ll need them in the next few years, because the stock market can be volatile in the short term.

A good goal for your grandson may be to continue saving half of his paycheck and split it between his savings account and Roth IRA. Even if he only invested $100 per month for the following year, the gain could be substantial. Assuming annual returns of 8%, that money would be over $56,000 by the time it reached its full retirement age of 67.

But just as important, saving even a small amount for retirement is a great habit to start at age 17. If your grandson can get used to investing 10-15% of his salary while he’s still a teenager and continue to do so throughout his career, he’ll be in great shape for retirement.

Ultimately, though, it’s your grandson’s money, so it’s his decision. But if he’s already saving half his salary at 17, I think you can trust him to make sound financial decisions.

Robin Hartill is a Certified Financial Planner and Senior Writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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