When it comes to teens and money, there is often a disconnect. Overall, teenagers are taking a greater interest in their own long-term financial health, but far fewer understand basic retirement planning. In a recent survey of 13- to 18-year-olds, 83% said they had already thought about their retirement. However, most teens mistakenly believed saving money in a bank account was the best long-term strategy. Only 45% said investing in stocks and bonds with the help of a financial advisor, which would offer a greater long-term return, was the preferred way to go.

“The greatest money-making asset you can possess is time,” said Ed Slott, a certified public accountant and founder of Ed Slott and Co. “Someone who starts at 15 has a huge advantage even over someone who starts at 25.” Slott recommends opening a Roth individual retirement account to get a head start. Contributions to a Roth IRA are taxed up front and earnings grow tax-free. In retirement, withdrawals are completely free of tax and penalties (as long as the account has been open for at least five years). Since there are no age restrictions, anyone with earned income can contribute.

In Christopher Jackson’s 12th grade personal finance class, students open Roth IRAs with an initial grant of $100 from the community, which they then learn how to maintain on their own. Jackson emphasizes the importance of financial education, stating, “this is going to be the most important class they are going to take in their life.” While there is a maximum IRA contribution limit, it’s less about how much you save and more about the act of saving. “It doesn’t have to be a lot. Time is the key asset.”

If there are more immediate needs before hitting retirement age, account holders can withdraw their contributions at any time without taxes or penalties. However, it is advised to view tapping these funds as a last resort. “Roth money is the last money you should touch because that money is growing the fastest and it will never be eroded by current or future taxes,” said Slott.

Teenagers are showing an increased interest in retirement planning, but there is still a need for further education on the best strategies for long-term financial health. Investing in stocks and bonds, opening Roth IRAs, and understanding the importance of time as an asset are crucial steps towards a secure financial future. It is essential for teens to start early, seek guidance from financial advisors, and prioritize saving for retirement in order to benefit from the power of compounding interest. Ultimately, the decisions made today will impact their financial well-being in the years to come.

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