The Power of Tax-Free Growth
‘Tis the season for teenagers and college kids to begin learning the joys of becoming a productive member of society by putting down their electronics and getting a summer job!! These jobs sometimes include working for an established company as either an intern or other type of skilled or unskilled laborer. With these jobs comes something wonderful………a “paycheck”. And with a “paycheck” comes something else……reported income and possibly taxes!!! However, not all summer jobs have reported income. I’ve talked to numerous high school and college kids working as a Nanny, lawn mower, baby-sitter, waiter/waitress, caddy, etc. These jobs have one thing in common……CASH.
Disdain for taxes often leads kids to pocket cash earnings from a summer job and spend it on ice cream and concert tickets, causing them to MISS OUT on a WONDERFUL OPPORTUNITY!
Unfortunately, most people fall victim to their disdain for taxes and don’t claim this income. They simply pocket the cash, spend it on Andy’s ice cream and Lollapalooza tickets, and MISS OUT on a HUGE opportunity. Instead, what we recommend is that these kids claim this income, (dependent kids are taxed at trust tax rates which is 10% of income up to $2,600 and 24% of income from $2,601 to $9,300) and ask their parents to pay this tax. THEN, take this cash and deposit it into a ROTH IRA!! I know it’s not nearly as fun as Lolla, and tastes nothing like an Andy’s frozen yogurt, but it’s quite satisfying if a $1,000 deposit into a Roth IRA grows at an annual rate of 7% for 40 years and potentially turns into $15,000 TAX FREE (FYI – these growth rates aren’t guaranteed but are quite attainable). Something to think about…………
This is a hypothetical example for illustration purposes only. Actual investor results will vary. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Earnings withdrawn prior to 59½ would be subject to income taxes.