With summer right around the corner, many students are thinking about summer employment. 

Your kids will thank you for this – in 50 years

Here’s a phrase you can whisper in the ear of student workers: “Roth IRA.” Do you think it’s too early for these young members of our work force to plan for retirement? Just how much money do you expect will be left in the Social Security coffers when the Baby Boomers are done reaming the system?

Not only is it not too early to start discussing retirement savings plans with our children and the young workers we hire, it should be mandatory planning as soon as students begin taking jobs.

Although we may not have the benefit of a reliable crystal ball to tell us what the future will look like to retirees 40-60 years from now, we can expect the average life expectancy to increase, as medical research provides more opportunities to slow the aging process and more cures for life-threatening diseases. Not only will our children and grandchildren be facing the likelihood of a public retirement system that has been strained to its limits and possibly completely drained, but also they will be looking at a longer period of time in which they may not be able to be a part of the workforce.

How the Roth IRA works

A Roth IRA is a retirement account to which a worker can contribute the lesser of $2,000 or all of his earned income each year. If a worker earns $700 for the year, the maximum contribution for that year is $700. If he earns $3,000, the maximum contribution is $2,000.

The contributions to the Roth IRA account are not tax deductible, and the earnings on the account are tax free, so when the worker eventually is allowed to withdraw money from this account, none of the withdrawals are taxed.

A self-employed worker calculates his maximum Roth contribution based on his net earned income, not his gross income. If the worker earns $700 and incurs $100 in expenses, his net income is $557 ($700 less $100 expenses, less $43 which represents ½ of self-employment tax allowed as a deduction) and that is the maximum amount that can be contributed to the Roth IRA.

As soon as your child begins working, he can set up and begin participating in a Roth IRA. Even if the child only makes contributions for a short period of time, the earnings on the account can be astronomical. Donna Kellison, a director at Blue & Co., CPAs in Indianapolis, recommends to her clients that they set up Roths for their children or grandchildren and make contributions for five years.

“Every grandparent wants to leave a legacy of cash as well as teach children to work and save. What better way than to match wages earned with gifts of $2,000 stipulated to be invested in a Roth IRA. An investment of $2,000 per year for five years beginning at age 16, earning 10% per year, will be worth nearly $1 million when that grandchild is ready to retire at age 65. Left untouched, at age 69 the Roth IRA would be worth in excess of $1.4 million.”

And remember, all of this money is tax-free.

The earning percentages may vary over the years, and you can certainly invest money for more than the first five years, but with some simple calculations you can prove that starting an account like this when a person is very young will result in a great amount of financial security when that person is ready to consider retiring.

What you can do today

Most student workers are not going to want to take their summer job money and put it in a savings account that they can’t touch until after they reach age 59 ½. It’s hard for a 17-year-old to think that far into the future, when today’s desires of a new car or new clothes far outweigh any thoughts of retirement.

If gifting the money for the Roth IRA is not an option, consider offering your child a matching program. You can encourage the child to save some of her summer earnings and agree to match her, dollar-for-dollar with your own contribution. This relatively small investment for a few years will provide both of you with the knowledge that your child will have financial security in the future.

You can set up a Roth account today, at a bank or brokerage firm. There are many on-line Internet sites that allow you to set up Roths as well. You get to control how the money is invested, and you can choose from an array of money funds and interest-bearing accounts or you can invest the money in the stock market.