The start of summer means the end of the school year.
For many high school and college students, it’s also time to return to summer jobs.
This year, parents may want to encourage students to save some of their earnings. Talking to children about saving is a way to introduce financial concepts and help them create good saving habits. Even saving a small amount can be significant. Putting aside roughly 20%, based on average summer earnings, could yield $1,000 per summer in savings.*
Start early with a Roth IRA
Students may want to consider using a Roth IRA for summer earnings. Here are five reasons why a Roth IRA may make sense for a young saver.
1. Contributing a modest amount can lead to substantial tax-free growth over time
If these original contributions totaling $6,000 were left to grow in a Roth until retiring at age 65, based on these assumptions, the balance would total over $160,000.
2. Contributions can be withdrawn at any time without taxes or penalty
- This can be beneficial for a student who may need to tap into the account for future expenses such as a down payment on a car, or first and last month’s rent for an apartment after graduating college
3. Contributing to a Roth IRA starts the “five-year” clock running
- One of the requirements for a distribution from a Roth IRA to be considered qualified for tax purposes is whether the Roth account has been established for at least five years
- This “five-year clock” for earnings on account contributions is based on the year of the first contribution to a Roth
4. Assets held in Roth accounts are not included in calculations for federal financial aid
- While this could potentially change in the future, assets held within Roth IRAs are not reported on the federal FAFSA form. However, distributions from Roth IRAs while still in college may be considered income for financial aid purposes and could negatively impact the following year’s aid award
5. Withdraw up to $10,000 allowed for first-time home purchase
- A qualified distribution from a Roth IRA for this reason can avoid taxes and a 10% early withdrawal penalty on earnings
Parents can help with financial education
Whether they are saving for the latest computer gaming editions, a car, or college education, parents can help children learn how to save to meet their goals. If college is part of their future plans, explore our “Four-year action plan to prepare for college,” which outlines what students need to know during their high school years.
*According to ZipRecruiter the average wage for summer employment in 2021 is $16.46/hour. If you assume working 35 hours a week for 10 weeks in the summer, then total earnings would equal $5,760.
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