Can you imagine how much money you'd have saved by now if you'd started at 18? Or even at 16?
Even if you put away next to nothing, time and growth and regular contributions would have put you way ahead of the game. We might not be able to go back in time, but we can help our kids get the most of their youth by helping them open a Roth IRA as soon as they start working part-time (yes, even minors can contribute to a Roth!).
The case for starting early
When it comes to saving and investing, time is your friend.
To accumulate $1 million at a 7% growth rate, you could save almost $24,000 per year for 20 years... or about $4,500 a year for 40 years.
This is the reason everyone is always telling you to start early. It really does make a huge difference.
Why Roth IRAs are great for young people
If your child is working part-time, he or she is most likely not earning very much. That means either a very low income tax bracket, or even paying no taxes at all.
This is the kind of situation a Roth IRA is perfect for: Because your child doesn't pay much in taxes, a tax deduction for a standard IRA wouldn't be of much help anyway. However, in 40-plus years, any withdrawals from a Roth IRA will be tax-free, which means your child can enjoy completely tax-free income from his or her account -- which will, by then, hopefully have a much heftier balance.
IRAs are also a great savings tool because of the penalties involved with raiding them. While there's always the risk that your child will be sorely tempted to tap into the balance early despite the fees, they do act as something of a barrier. Keep an eye on this until you're sure your kid is past the point of this kind of short-term thinking.
How to do it
First, find a way to convince your child to either contribute his or her income to a Roth IRA -- maybe that involves an adult-to-adult conversation, but many teenagers will likely require a bit of massaging.
Your child already has a job, so that's a great start. Nothing quite seals the value of money in your mind like having to work for it, especially when you wake up one day and realize that those jeans you want would cost you the equivalent of two full days of work.
But saving that money can be hard. One fantastic strategy is to offer your child their first-ever matching contribution. Now that he or she appreciates how hard it is to earn money, free money might be a little more attractive.
You could also take advantage of teenage rebelliousness by educating your child in the fine art of marketing. There are any number of exposé-style books or documentaries about the subject out there, and they'll help your teen see that their drive to spend money on consumer goods is anything but inborn. It also presents a great opportunity to help your child see that investing in oneself is the best strategy for a good life, rather than investing in stuff.
Finally, help your child track his or her spending. There are apps for this, so it won't be a painful process -- but it might be very painful for your child to find out that, for example, she blew the equivalent of that pair of jeans on any number of coffees with friends.
Of course, it's worth pointing out that teens are incredibly sensitive to hypocrisy, as you might remember from your own experience. All of these lessons and tips will go down easier if you're also embracing them.
However you tackle the issue, you'll want to open a Roth IRA in your child's name and make as much of a contribution as you can. Each year, check in and see if another contribution can be made, and double-check with your accountant about any income tax filings that might be required (depending on your child's income, he or she may need to file a separate return).
And then, we wait
For the first several years, your child may have little to no interest in what's going on in the account. That's OK: It might take some time for the lightbulb about investing and compound interest to go off.
But if you're lucky, it'll go off right as your child is entering the workforce full-time. Seeing the amount of growth possible in a few years may be just the push he or she needs to take that company 401(k) seriously, which will be another huge victory for financial security.
So, if you want to rest easy about your child's future, take your industrious part-time worker and open that Roth IRA. Your kid might not appreciate it now, but I think it's fair to say that in 50 years you'll be getting all the gratitude that kind of planning deserves.