Should an 18-Year-Old Open a Roth IRA? (The Best Gift for Their Future Self)

Why Your Teen Should Start Investing Now (Even If It Sounds Crazy)

Look, I get it. Talking to your 18-year-old about retirement planning might seem like the ultimate eye-roll-inducing conversation. They’re probably more focused on college plans, summer jobs, or the latest TikTok trend than thinking about their golden years. But here’s the truth – there is literally no more lucrative financial move than having your teenager open a Roth IRA.

And I’m not exaggerating here. The math is absolutely mind-blowing.

The Magic Ingredient Only Young People Have: TIME

The reason a Roth IRA makes so much sense for an 18-year-old boils down to one simple factor that us older folks can never get back: time.

Let’s break down what happens when you start early:

• $1,000 invested at age 15 growing at a modest 6% will be worth more than $18,000 in 50 years
• Investing just $1,000 annually from age 15 to 65 could grow to over $325,000
• But wait until age 35 to start? That same $1,000 annual investment would only reach about $90,000

To get the same $325000 if you start at $35 instead of $15 you’d need to contribute over $3. 500 annually – that’s more than 3 times as much!.

This is the power of compound growth, which is pretty much the same thing as magic when it comes to money.

What Exactly IS a Roth IRA Anyway?

Before we go further, let’s clarify what makes Roth IRAs special:

1. After-tax contributions – You pay taxes on the money now, before it goes in
2. Tax-free growth – No taxes on the investment earnings while they grow
3. Tax-free withdrawals in retirement – Once you’re 59½ (and the account is at least 5 years old), withdrawals are completely tax-free
4. No required withdrawals – Unlike traditional retirement accounts, Roth IRAs don’t force you to take money out at any age

Why Roth IRAs Are PERFECT for 18-Year-Olds

They’re in the Lowest Tax Bracket They’ll Ever Be In

Teenagers and young adults usually don’t make a lot of money and are in very low tax brackets—sometimes as low as 20%! This means they pay very little to no tax on their contributions now but will enjoy tax-free growth and withdrawals forever.

Kristin McKenna writes in her Forbes article, “Since most young adults are in a very low tax bracket, even at 20%, a Roth IRA may be the perfect way to help your child start saving and investing for their future.” “.

Flexibility for Young Adults

One huge advantage of Roth IRAs that’s particularly valuable for young people: you can withdraw your contributions (not earnings) anytime without taxes or penalties.

This flexibility means if they absolutely need some cash for an emergency down the road, they can access their original contributions without penalty. Though I’d strongly encourage them to leave the money alone to keep growing!

The Rules: Can My 18-Year-Old Even Open a Roth IRA?

Here’s what you need to know:

• They must have earned income – This can be from a part-time job, summer gig, or self-employment
• Contribution limit – In 2024, they can contribute up to $7,000 or the amount of their earned income, whichever is less
• No age restrictions – Being 18 actually makes it easier, as they can open their own account (younger teens need custodial accounts)
• Income limits – In 2024, eligibility begins to phase out at $146,000 for single filers (not typically an issue for most teens!)

The Parent/Grandparent Secret Weapon: Matching Contributions

Here’s where it gets really interesting. While your teen must have earned income to be eligible for a Roth IRA, the actual money contributed doesn’t have to come from their earnings.

This means you as a parent (or grandparent) could offer a matching contribution to incentivize them to save. Suze Orman suggests this brilliant strategy: “Maybe you offer to match every dollar they agree to contribute with $2 or more of your own.”

For example, if your 18-year-old earns $3,500 from their summer job, they could:

• Contribute $1,000 themselves
• You match with $2,000
• Total Roth IRA contribution: $3,000 (well within their eligible amount)

They still get to spend most of their earnings, but they’re also building wealth for the future!

How to Actually Open a Roth IRA for an 18-Year-Old

Opening a Roth IRA for your 18-year-old is surprisingly simple:

1. Choose a provider – Any major discount brokerage (Fidelity, Vanguard, Charles Schwab) offers Roth IRAs
2. Complete the paperwork – At 18, they can open their own account in most states
3. Fund the account – Make the initial contribution
4. Select investments – Low-cost index funds are often recommended for long-term growth
5. Set up automatic contributions – Even small regular deposits add up over time

Many brokerages have eliminated minimum investment requirements, so you can often start with whatever amount fits your budget.

Will a Roth IRA Hurt College Financial Aid?

Good news! Retirement accounts, including Roth IRAs, aren’t reported as assets on the Free Application for Federal Student Aid (FAFSA). So your teen can keep building their retirement nest egg without worrying about it affecting their financial aid eligibility.

Potential Drawbacks (Yes, There Are a Few)

To be fair, I should mention a couple of potential downsides:

• Early withdrawal penalties on earnings – While contributions can be withdrawn anytime, earnings withdrawn before age 59½ may be subject to taxes and a 10% penalty (with some exceptions)
• Need for long-term commitment – The biggest benefits come from leaving the money invested for decades
• May be a hard sell – Let’s face it, retirement seems very abstract to most teenagers

Real-Life Example: The Power of Starting at 18

Let me share an example similar to one from the Forbes article:

Imagine Emma is 18 and works part-time during college. She earns $5,000 annually and contributes $2,000 to her Roth IRA, which her parents match for a total of $4,000 per year through college. After graduating at 22, she continues contributing the maximum ($7,000 in today’s dollars) until age 30 when she has other financial priorities.

By contributing just for those 12 years (18-30) and then never adding another penny, Emma’s Roth IRA could still grow to well over $1 million by retirement age, assuming a 7% average annual return.

That’s the incredible power of starting early!

What Financial Experts Say

Financial experts overwhelmingly support young people starting Roth IRAs:

• Suze Orman calls it “crazy smart” and “no more lucrative financial move” for teenagers
• Dave Ramsey is a huge proponent of Roth accounts in general, suggesting they’re ideal for long-term growth
• Kristin McKenna emphasizes how “everyone wishes they started saving earlier for retirement”

Beyond the Money: Teaching Financial Literacy

One of the best reasons to help your 18-year-old open a Roth IRA isn’t even about the money – it’s about the financial education opportunity. It creates “teachable moments” around:

• The power of compound growth
• The impact of investment choices
• The importance of long-term thinking
• Basic tax concepts
• Balancing spending and saving

These lessons are invaluable and will serve them throughout their life.

Taking Action: How to Convince Your Teen

Let’s be honest, convincing an 18-year-old to open a retirement account won’t be easy. Here are some approaches that might help:

1. Show them the numbers – Actual dollar amounts tend to make more impact than concepts
2. Offer matching incentives – “For every dollar you contribute, I’ll add two dollars”
3. Make it concrete – “This could be the down payment on your future house”
4. Start small – Even $500-1000 to start is worthwhile
5. Give them ownership – Let them help choose investments and track growth

Final Thoughts: The Best Gift for Their Future

Starting a Roth IRA at 18 might be the single most valuable financial gift you can give your child. It’s not just about the money they’ll have decades from now – it’s about setting them on a path of financial responsibility and literacy that will benefit them throughout their life.

As a parent, I can’t think of many better ways to help secure your child’s future than giving them both the knowledge and the head start that comes with opening a Roth IRA at 18.

What do you think? Have you helped your teen start investing, or are you considering it? I’d love to hear your thoughts and experiences in the comments below!

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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult with a qualified financial professional before making investment decisions.