Parents: This Suze Orman Advice Could Make Your Teen a Millionaire

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  • Finance expert Suze Orman believes parents should encourage teens to invest in a Roth IRA.
  • Teens who invest in a Roth IRA can take advantage of tax-free compound growth.
  • Parents will need to open a custodial account for their children under 18.

Parents have a chance to help their teens start on the path to building wealth.

If you want to set your teenager up for a life of unprecedented financial success, Suze Orman has some advice for you. Orman has identified a step that your teen could take now that could help them become a millionaire over time.

Here's what Orman thinks you should do.

Could this set your teen up for wealth?

Orman has advised that any teeenager who has earned income is eligible to invest in their own Roth IRA -- and she suggests they should take advantage of this opportunity.

"I realize retirement is likely the last thing on the mind of your teenager or young adult, but they are at the absolutely perfect age to take full advantage of compound growth," Orman said. "I want you to step up and lead the way."

Orman explained that Roth IRAs are tax-advantaged retirement plans that an individual can invest in as long as they have earnings from work. Roth IRAs allow you to grow your money tax-free, so if you invest when you are a teeanger, your money can grow exponentially and leave you with an absolute fortune over time.

"A $2,000 contribution to a Roth IRA at age 15 will be worth close to $50,000 at age 70, assuming a 6% annualized rate of return," Orman said. "The same $2,000 saved at age 40 would be worth less than $12,000 at age 70. The only difference is the time the money was invested."

Teens who invest steadily and who invest up to the annual contribution limit, which is $6,000 this year, could easily end up with millions by their retirement age as their money is reinvested and works for them. For example, someone who invested $500 per month every month for 40 years and earned a 10% average annual return would have about $2.66 million.

If your teen gets started now and keeps going as they enter the working world, this could easily be their happy fate.

How to get your teen to invest in a Roth IRA

Orman explained that if your teen is still under 18, you would need to open a custodial IRA for them, which they can take over when they reach adulthood. And she advised parents to encourage kids to save a portion of their earnings -- perhaps by agreeing to make matching contributions.

"I want to be clear: You are only to add a matching contribution if your finances are in great shape," Orman said. "And I would rope in grandparents, aunts, and uncles. They can gift money to add to the Roth IRA as a birthday/graduation present. Again, the only rule is that total contributions to an IRA in a calendar year can’t exceed what the child earned."

Orman said parents can also help their kids learn to invest this money in index funds that have a low cost and provide consistent returns, as buying these types of stocks will make it easier for their money to grow.

Following this advice could be invaluable, and your teen will likely thank you when they amass the retirement nest egg they need with minimal effort after you helped them start early.

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