Should Your Teen Save for College or Invest for Retirement?

Smiling indian girl student professional employee typing on laptop sit at home office table, happy hindu woman studying e learning online software using technology app for work education concept.
fizkes / Getty Images/iStockphoto

Nearly six million American teens (ages 16 to 19) are working this summer, filling gaps for businesses that can’t find adult workers during the labor shortage, GOBankingRates reported. And it’s not just entry-level positions they’re securing, either. People as young as 19 are taking on roles such as restaurant general managers for $50,000 a year plus bonuses.

See: How Will Teens and Gen Z Invest Their Money? Think Low-Risk, ESG and RoboadvisorsFind: Gen Z Teens Exceed Past Generations in Financial Literacy

With 10% more teens in the workforce than prior to the pandemic, 2021 represents an excellent opportunity for teens to start savings or investment accounts. But should they begin saving for retirement, college — or both?

“If a teen is going to get started saving or investing, just getting started is the most important thing,” says Eric Roberge, Certified Financial Planner and founder of Beyond Your Hammock, a fee-only financial planning service for high-achievers in their 30s and 40s.

Roberge’s views correspond with people who recently took a GOBankingRates survey. Most agreed that teens should start saving as early as possible.

  • 22% percent of survey respondents said that tackling retirement savings early will give teens a better quality of life in their later years.
  • 21% said that teens should save for their education.
  • 51% of respondents agreed that both are worthy goals, and teens should focus on saving for both.

Meanwhile, only 6% answered, “Why should teens worry about either?” implying that no matter how much they’re earning, teens don’t need to focus on saving money until they reach adulthood.

Saving or Investing?

Before your teen starts tucking money away, though, it’s important to differentiate between saving and investing. That will help them choose the right tools for wealth management.

Investing for Everyone

“Choosing between saving for college or investing for retirement are two very different goals and teens should differentiate between savings — which is often just delayed spending — and investing — which is designed to grow your money over time,” Roberge says.

He continues, “When you set a savings goal, you’re usually trying to accumulate enough money to eventually make a purchase — in this case, spending on a college education via tuition and fees. Investing, on the other hand, is usually done with the intent of growing your assets. Both are important and meaningful, but you need to get clear on what your goal is and then what your timeline looks like to determine if you need to prioritize saving or investing.”

529 Savings Plan Provides Flexible Money for College or Trade School

If your teen has their sites on college or trade school, it might make sense for them to begin contributing to a 529 college savings fund. Most 529 plans are sponsored by the state where you live, so fees, interest rates and requirements may vary.

Jenna Lofton, investor, stock trader and founder of explains, “529 accounts are tax-free savings accounts specifically designated to pay for college expenses, which includes tuition, room and board, books, computers, transportation — everything except clothes and incidentals like entertainment or food while on campus.”

Discover: Acorns, WeBull and More Apps Teens Can Use To Invest

Parents, grandparents and other people can also contribute to a 529 for a college student or future student, which creates a great opportunity for the teen to grow their savings through gifts.

Investing for Everyone

“College graduates leave school with an average of $30,000 of debt. The earlier you can save, the better,” says Phillip Allen, CEO of Common Sense Retirement Planning in Greenville, South Carolina. “A 529 savings plan is a great way to save for college. There are a lot to choose from and some have annual returns that reach 15% (or higher).”

You can change the beneficiary of a 529 Plan if your teen decides not to attend college. The beneficiary can use the money for any purpose, but if it’s not used for educational expenses, they will pay income taxes plus a 10% penalty on the earnings, according to the Schwab Resource Center.

Start a Roth IRA and Watch Money Multiply

If your teen isn’t sure if they will attend college, a Roth IRA is a good way to hedge bets and begin saving for college, retirement or even a down payment on a first home, experts say.

Julian B. Morris, Certified Financial Planner and Chartered Financial Consultant for Concierge Wealth Management of Boston, Massachusetts says, “A Roth IRA is extremely powerful for teenagers because it can be used in many ways.”

A Roth IRA, or individual retirement account, permits the account holder to withdraw contributions without penalties for college, a down payment on a first home (up to $10,000) and a number of other reasons. If they’ve held the Roth IRA for more than five years, these funds would also be tax-free, according to

However, it’s wise to hang onto that Roth IRA until age 59 1/2 and enjoy the benefits of compounding interest and tax-free, penalty-free withdrawals of not just contributions, but earnings.

Investing for Everyone

Learn: Teen Investing Apps May Deliver a ‘Kiddie Tax’

“Assuming you continue to save into a Roth IRA until you are no longer eligible, you will have a sizeable nest egg available for you to withdraw in retirement, tax-free,” Morris explains. “For example, if you save $5,000 a year into your Roth for the 15 years between ages 15 and 30 and achieve a 7% rate of return at age 30, your balance will be $137,278.99. If you don’t touch that for the next 30 years and never contribute again, at age 60 you will have $1,120,814.73! By starting to save early into a Roth IRA, the power of compound interest is magnified, as you can see by the numbers shared above.”

As long as you have earned income, reported to the IRS on a W-2 or 1099 form, you can open a Roth IRA. For teens who are working side jobs or have sporadic income, Lofton recommends trying to save just one dollar per day for retirement until they have $365 set aside. Most IRAs have no minimum contribution requirements, but investment accounts may have minimums to open the account.

Launch a 401K If Your Employer Matches Funds

Contributions for a Roth IRA are made after taxes, which is good for teens who are most likely in a lower tax bracket as they start their working life than they will be as they advance in their careers.

However, if an employer offers a 401K with matching funds, not taking advantage of that savings vehicle is like leaving money on the table.

“If you are fortunate enough to have an employer that offers a matching 401K, get the max-match if at all possible,” says Chris Rowell, Vice President – Private Wealth Advisor at Westwood Wealth Management. “This is virtually free money just by contributing to the 401K. Being able to start investing early and to have the ability to grow your money and see it compound over time will undoubtedly help to position any individual to be better prepared for retirement and to be financially independent.”

Investing for Everyone

See: Teens Are More Knowledgeable Than Their Parents about Cryptos, Survey Says
Find: How To Make Money as a Teen in 2021: 22 Best Gigs

Still Not Sure How to Steer Your Teen?

With so many options available, investing can be overwhelming for adults, much less teenagers who are not yet experienced managing money. Take heart, because doing virtually anything in terms of saving and investing is better than doing nothing at all.

“They don’t have to get everything perfectly correct right off the bat,” Roberge says. “The fact that you’re thinking about this in your teenage years is a huge advantage because one of the most critical factors in anyone’s financial success is time. The earlier you get your money in the market and the longer you leave it there, the more you’ll benefit from that exponential growth factor that compounding returns can provide.”

More From GOBankingRates


See Today's Best
Banking Offers