Individual Retirement Account

The first piece of advice I'd offer is to start an individual retirement account. There are two options in this arena. A traditional IRA has current contribution limits of 5000 dollars per year. If you contribute to one of these (which you can start at virtually any brokerage firm (mine is at Vanguard)), you can deduct the amount you contribute (up to 5000) from your tax liability. Also, you don't get taxed on the earnings until you take the money out of your account (like when you are in your fifties or sixties or later). The alternative, a Roth IRA, has the same contribution limits, but you can't deduct the money from your tax liability. However, when you remove the money later in life, all the money is tax-free. Basically, on a Roth, you pay the taxes now, and on a traditional IRA, you pay later. You don't pay taxes on the earnings on either. You can't contribute to a Roth if you make more than UPDATED 107,000 per year. For more details, on things like if you are married filing jointly, check out: http://www.rothira.com/tools/income-limits.php

Now, you may be thinking, why, as a 16 year old, should I think about retirement? First, you should think about lowering your taxes. Second, you can take the first 10,000 of earnings out of your IRA without paying a penalty if the money is for a down payment on your first home. 10,000 in tax free earnings towards the biggest purchase of your life. The third reason is that the longer you save for your retirement, the less you need to save per year. Remember, in retirement, you will be paying less in taxes because you will likely need less money, because large expenses in life like education and a mortgage will be paid off. So, your taxes will be lower. All in all, starting an IRA as early as possible sets you up when you want to buy a home, and when you want to retire.

http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/index.htm

http://www.bankrate.com/finance/money-guides/irs-rules-for-early-ira-withdrawals-1.aspx