The Teaching Moment that is The Summer Job

Robert Ramos |

High school and college students are now working their summer jobs.

We all know the many positive lessons of a summer jobs: instilling a work ethic, the good feeling that comes from having earned money in your pocket and the sense of independence that grew as your bank account fattened up.

There is one important lesson too many of our young people are not learning. They are not being taught to save. What is even more disappointing is they are missing out on a potential tax planning opportunity.

Consider these facts:

  •  A person working 40 hours a week for 12 weeks at $10 per hour earns a gross income of $4800.
  • With the current levels of standard deductions, summer job holders will owe very little or no federal income tax.

 Here is the planning opportunity:The Roth IRA

  • Any single individual with earned income can contribute the greater of 100% of their earned income for the year or $5500
  • The Roth provides for tax free growth if the money is kept in the Roth till age 59 ½

Adding an incentive:

Mom, Dad, Grandma and Grandpa can add an incentive to save. Offer to match what your young adult contributes to their Roth. (Make sure not to go over the maximum contribution amount of course!)

Conclusion:

The summer job income is likely to be taxed at the lowest rate of the employee's entire life. It is possible they may owe no income tax. If they contribute to a Roth IRA and leave the money in the Roth till they are 59 ½, withdrawals from the Roth may be free from income tax.

I did a quick calculation on http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx. A 16 year old who contributes $100 per month for 44 years and gets a 6% rate of return may have $247,000 of tax free money in their account when they turn 60. Imagine what that amount could be if they increase their contributions as their income grows over time and start their 401k as soon as they are eligible!

This is an opportunity to teach your kids the value of combining a disciplined savings approach with a long time horizon and beneficial tax treatment.

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