Summer Savings: Summer Jobs Can Translate into IRA Savings

Jun 15, 2022

By Theresa Cagle Fry, Senior Vice President and Manager of IRAs, Retirement & Education Planning

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If you are like most parents with a household of kids at home for the summer, you are probably busy looking for summer camps and other activities to keep them busy all summer long. For those of you with teenagers or college students who will be working during the summer, keep in mind that there are more advantages to that summer job than the kids having a little more spending money. Those summer earnings can actually be used to open and fund a traditional or Roth IRA.

Convincing your kids to use their summer earnings to open an IRA might not win you the parent of the year award. They probably have a million other things they would rather spend their money on than saving for retirement. The good news is they don’t have to be the ones funding the IRA.  You can make their IRA contribution for them.

In fact, anyone can make the IRA contributions as long as the child is the one with the earned income. If you want to teach them the value of saving early and often, or the basics of investing, you could have them contribute a portion while you (or grandparents, aunts, uncles, or non-family, etc.) match what they put in. For college-bound students, keep in mind that savings in an IRA is not considered an asset when applying for financial aid on the Free Application for Federal Student Aid (FAFSA), but their personal savings is.

If your child will be working but not at a place where they get a regular paycheck, it’s important that the child’s wages are documented. Household chores don’t typically count as earned income, but money earned from steady summer jobs (like mowing lawns or babysitting) that is from someone other than a parent – or even from employing your children in your own business – can be treated as earned income. Make sure you discuss your situation with your tax professional for guidance on what kinds of records to keep for the type of employment your child has before making contributions. Contributions are limited to 100% of earned income or $6,000, whichever is less.

When deciding what type of IRA to use, keep in mind that the tax advantages of a traditional IRA and a Roth IRA are different. Traditional IRAs can provide an income tax deduction for individuals with lower incomes, but if the child does not file an income tax return the tax deduction may be of little value. Traditional IRA contributions are generally included in taxable income when distributed and can also be subject to a 10% early withdrawal penalty if taken before the age of 59½. Roth IRA contributions are not tax deductible and are not reported on a federal income tax return. Another advantage is that Roth IRA contributions can be withdrawn without income taxes or penalties. Earnings on contributions may be taxable and subject to the 10% early withdrawal penalty if they are removed before reaching age 59½ if the Roth IRA has not been funded for at least five years. However, after satisfying the combination of five years and age 59½, earnings are also income tax-free.

Time is the best ally when using tax-advantaged savings accounts like IRAs, so help your working children get a jump start on retirement by contacting a financial advisor today!


Benjamin F. Edwards does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.