Q&A: Retirement accounts for teenagers

Dear Liz: My 16-year-old grandson has a job stocking shelves at a large grocery chain. His parents opened a low-cost minors investment account, which he has now funded to the max of $6,000. Is there anywhere else he can invest his earnings?

Answer: It sounds like what your grandson funded was an IRA or a Roth IRA. These retirement accounts have an annual $6,000 contribution limit for people under 50. (People 50 and older can make an additional $1,000 “catch up” contribution.) The Roth IRA has income limits, but your grandson won’t have to worry about those until he earns more than six figures.

Starting to save so young for retirement is a marvelous idea, since all those decades of compounded returns will really add up. Let’s assume two people save $6,000 a year and earn a 7% average annual return. The person who starts saving at age 36 would accumulate about $650,000 at age 66. The person who starts at age 16, by contrast, would have about $2.5 million.

Your grandson’s parents were smart to open a low-cost account, presumably at a discount brokerage. Next to starting early and investing as much as possible, keeping fees low is the best way to maximize how much he ultimately accumulates.

The simplest way to start investing would be to choose a low-cost target date mutual fund. He would choose one with a date closest to his likely retirement age, so one that’s labeled something like “Target Date 2070.” If you want to encourage him to learn more, consider buying him a book about investing, such as “O.M.G.: Official Money Guide for Teenagers” by Susan and Michael Beacham.

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