Daily Doses of Finance

By Vibhav Duggirala, 10th Grade Investor

If you want to start saving for the future, you have probably heard of something called an IRA or a Roth IRA. These accounts are designed to help you save for retirement. Even though retirement seems super far away when you are in high school, learning about these now can give you a big advantage later in life.

In this article, I will explain what an IRA is, how it works, what makes a Roth IRA different, and which one might be better for young people like us.

What Is an IRA?

IRA stands for Individual Retirement Account. It is a special type of savings account that helps you invest money for the long term. The main goal is to grow your money so you can use it when you are older and no longer working.

There are two main types of IRAs: traditional and Roth. Both let your money grow over time through investments like stocks, ETFs, and mutual funds. What makes them different is how taxes work.

How a Traditional IRA Works

When you put money into a traditional IRA, you may be able to deduct that amount from your taxable income. This means you pay less in taxes now. The money inside the IRA grows over time and you do not pay taxes on it until you take it out in retirement.

This can be helpful for adults who want to lower their taxes today. But when you retire and take the money out, you will have to pay income tax on it then.

What Is a Roth IRA?

A Roth IRA works in the opposite way. You put in money that you have already paid taxes on. That money grows over the years and when you retire, you can take it out without paying any taxes at all.

This is a great option for teens and young adults who are not making a lot of money yet. Since you are probably in a low tax bracket now, it makes sense to pay taxes today and enjoy tax free money later.

Why Roth IRAs Are Great for Teens

Roth IRAs are perfect for young investors because time is on your side. If you start investing early, even small amounts can grow into something huge by the time you are older. You do need to have earned income to contribute, like money from a part time job or a business you started.

Many parents can help their kids open a custodial Roth IRA where the parent manages the account until the child turns 18. You can invest in index funds, ETFs, and more, just like with a normal investment account.

Conclusion

Learning about IRAs and Roth IRAs now can help you make smarter choices with your money later. A Roth IRA is a great tool for teens because it gives them a chance to build wealth early and take advantage of tax-free growth. If you have a job and want to start investing, talk to a parent or trusted adult about opening a Roth IRA. Your future self will thank you. Building wealth together!