Dear Penny: Can My 17-Year-Old Grandson Invest in a Roth IRA?

Grandparents sit on a couch with a laptop as their grandson hovers over them listening to what they have to say.
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Dear Penny,

My 17-year-old grandson is working after school and putting half of his salary in a savings account. His grandfather and I have prepaid his college tuition, so he will have no big expenses there. 

I would like for him to invest in a Roth IRA. In 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?

-J.

Dear J.,

In theory, this is a great idea. The big advantage of a Roth IRA is that you pay upfront 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 have a huge payoff at retirement time.

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

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Before I 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 from working. Age isn’t a factor. The classic example here is that even the Gerber Baby could open a Roth IRA.

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

Because your grandson is a minor, he’d need a custodial Roth IRA. He’d own the money, but an adult would need to make the investment decisions. Once he reaches the age of majority — between 18 and 21, depending on the state — he’d 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’d be able to withdraw the contributions (but not the earnings) at any time. With the earnings, he’d pay a 10% early withdrawal penalty, plus income taxes on withdrawals before age 59 ½. 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, make sure you follow up with some guidance. A good place to start is by talking about short-, medium-, and long-term financial goals.

Buying a car or saving up spending money for college are examples of short-term goals. A medium-term goal might be to buy a house after college or pay for graduate school. 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 shorter-term goals, which is a frequently cited benefit of this account. For example, you can withdraw up to $10,000 worth of earnings for a first-time home purchase without owing taxes or penalties. You can also use the earnings for higher education and avoid the typical 10% early withdrawal penalty, but not the taxes. That flexibility is nice, but when you use the money on shorter-term goals, you don’t lock in the true power of the Roth IRA, which is unlimited tax-free growth.

Plus, you make money with a Roth IRA by investing in the stock market. You typically don’t want money invested in stocks if you’ll need it in the next few years because the stock market can be volatile in the short run.

A good goal for your grandson may be to continue saving half of his paycheck and splitting it between his savings account and Roth IRA. Even if he only invested $100 a month for the next year, the payoff could be substantial. Assuming 8% annual returns, that money would grow to more than $56,000 by the time he reaches his full retirement age of 67.

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

Ultimately, though, this is your grandson’s money, so it’s his call. But if he’s already saving half his paycheck at 17, I think you can trust him to make wise financial decisions.

If you have more than $1,000 in your checking account, make these moves.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].