It’s the end of another school year. This is the time when the kids start planning their summer break, their summer jobs, and for those graduating, their next step toward adulthood. The younger kids will look forward to swimming, playing, and maybe going to a summer camp. Those who are graduating will start planning for their freshman year of college or getting started in their first real job. Those in the middle will look forward to enjoying a summer of relaxation, maybe training for an upcoming sports season, or landing a summer job.
I’ve always assumed that the motivation for a young person to find that summer job is simply to have some spending cash. I thought that they want to work so that they can put gas in their car, maybe pay for a date, add some of the latest fashions to their wardrobe, or just have a little cash in their pocket. Money earned at a summer job provides a young person with independence, and I applaud the resourcefulness and responsibility of those who take this path.
I applaud louder and longer for those who want to do more with the money they earn at their summer job. I was pleasantly surprised by my nephew at a recent family gathering celebrating Mother’s Day. He’s been lucky enough to land what looks like a pretty good summer job. He’ll have work, a paycheck, and enough flexibility to train for the upcoming football season. He surprised me when he asked how he should invest part of his paycheck. He said that he wants to set some money aside and have his money earn money, instead of just sitting in a bank or spending it all. Kudos to him!
So what should a young person do when they want to set aside a little of their current cash flow to start building a better future for themselves? My nephew will turn 18 at the end of this summer. He obviously has a lot of life and life’s transitions in front of him. He’ll want to go to college. He’ll want to buy a car. He’ll probably eventually want to marry, buy a home, have kids, and all the normal things that are part of adulthood.
What investment vehicle would allow him to save for his future but be flexible enough to allow him access to his funds if he needs them for that car, that education, or that house? There are a few choices that could work for him, but the one I recommended was the multipurpose Roth IRA.
Why would I recommend a retirement account to an 18-year-old young man? A Roth IRA sounds like it’s a long-term investment plan, designed to be used in retirement. It is. But the Roth IRA is also a very flexible vehicle that can help him when other needs come up.
First, let’s cover the basics of the Roth. There are income eligibility limits. So if you make too much money, you can’t contribute. But that’s certainly not the case for most 18-year-old young people. For 2017, you can contribute 100% of your earned income, or $5,500, whichever is less. (Note: If you are over 50, you can contribute $6,500.)
While the main idea behind the Roth is to save for retirement, the account is very flexible. You can withdraw your contributions at any time without a penalty. This means that if my nephew wants to buy that car, pay for that college, or buy that house, he can access the money he has invested. It’s important to note that there are restrictions on withdrawing earnings. Typically, you need to have had the Roth IRA account for five years and be at least 59½ years old to withdraw the tax-free earnings from the account. However, there are exceptions. You can withdraw up to $10,000 to buy a first home, tax-free and penalty-free. And you can withdraw earnings with no penalty, but not tax-free, if you use the funds to pay for higher education expenses for you or a family member.
For those reasons, I think the Roth IRA is a great choice for my nephew, and for most people. It’s important to remember that the Roth IRA is just a type of account. To make it work most effectively, you must invest it properly. As I’ve discussed in previous posts, you should focus on building a globally diversified, asset class–based portfolio using low-cost index mutual funds or ETFs.
So if you know of a young person who is interested in doing something more with their summer job money than just spending it, the Roth IRA is a choice that can work out very well for them.