If you want to teach your child the value of a dollar this summer, take a look at some interesting tips on how they can leverage their summer job salaries.
At seventeen years old, one rarely thinks about retirement savings. But if you break down the numbers, they may think twice about how they spend those summer earnings.
As of January 1, 2020, the minimum wage in Massachusetts is $12.75/hour. This rate is slated to increase each year until it maxes out at $15.00/hour in 2023.
Whether a student is pursuing a paid summer job or internship, the opportunity for saving is elevated with minimum wage at an all-time high. Consider what retirement would look like if a student contributed to a Roth IRA and leveraged a tax-free savings or tax deferral account.
Before we show you the numbers, let’s dive into Roth IRA 101. A Roth IRA is a tax-advantaged individual retirement savings account, and one of the most effective ways to save for retirement today. The reason? Contributions are made after tax. So, as your investment earnings grow throughout the years, you do not pay income tax on withdrawals in retirement. Plus, when students start contributing at a younger age, they lock in those taxes paid at the lower rate, as opposed to a higher rate typically seen in retirement. It is important to note that students must be earning wages in order to contribute to a Roth IRA. Funds may not be invested from other sources.
Let’s look at an example to illustrate the savings possibilities. Seventeen-year-old Sophie takes a summer job at a local ice-cream shop for $12.75/hour. She works ten weeks and earns a total of $3,000 after taxes. If she decides to put half of her earnings into a Roth IRA and contributes $1,500 every year until she is 70 with an average eight percent return rate, Sophie’s Roth IRA would be worth $1,176,171. An ordinary taxable savings account would be worth $554,876. And if Sophie saved her money under her mattress, she would save $79,500.
There are a number of valuable lessons to discover when first starting out in the job market. Young adults learn about responsibility, work ethic, and setting goals, but most importantly, they learn about the value of a dollar. Teach them young on ways to leverage that dollar so they are best positioned for their future.
Contact me at the office at (781) 247-5569 or email me at stu@erocktax.com if you have any questions.
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.