Teens Can Contribute Summer-Job Money to a Roth

I am 17 years old, and I just learned about Roth IRAs. I will be getting a summer job and know that I can invest in a Roth IRA then. But what happens once I stop working for the summer? Can I still invest? Will the account stay the same until I can find another job?

What a great idea! Because of the power of compounding, contributing to a Roth IRA when you're young can give you a tremendous head start on your retirement savings.

As you mention, you need to have earned income from a job to open a Roth. But it doesn't matter where you work -- even if you just get a few hundred dollars from babysitting, newspaper delivery, working part-time at a store, lifeguarding or any other summer job.

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You can only contribute up to the amount of your earned income for the year, with a maximum of $5,000 for 2008. But you won't be limited to contributing only while you work in the summer. You can continue investing in your Roth throughout the year as long as you don't exceed the contribution limits.

You have until April 15, 2009, to contribute to your 2008 Roth IRA. And then you can add more money to the account the next year, if you end up working again in 2009.

You can open a Roth at any time, and you don't even have to contribute your own money. Your parents can help, just as long as your contribution isn't more than the amount of money you earned for the year. This could be a good way for your parents to spend part of their tax rebate, for example.

You'll be able to withdraw all of the money tax-free in retirement, or you can withdraw your contributions at any time without a penalty or tax bill. (You need to keep track of your contributions so you'll know how much you can tap tax-free if you need the cash before retirement.)

But the big payoff comes if you keep the money in the Roth for the long run. Say, for example, you earn $5,000 by working in 2008. Investing just $5,000 when you're 17 could grow to nearly $235,000 by the time you're 67, if your investments earn 8% per year -- just from that initial $5,000!

If you get in the saving habit and continue to add $5,000 every year until age 67, you'll have more than $3 million in tax-free money when you retire.

For more information about the rules, see Can Your Child Open a Roth IRA?, which also lists brokerages and mutual fund companies that make it easy to open a Roth IRA for a kid.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.