IRAs for teens? No, I haven't lost my mind.

I remember when I first mentioned opening an IRA for my then-teenaged son. Both he and my wife looked at me like I'd just announced we were moving to Pluto. But they aren't looking askance any longer.

By matching my son's summer earnings and putting the money away in a Roth IRA, the 24-year-old has already built up a tidy sum that, despite last year's drubbing, will continue to grow for many years to come. And, he's learned the value of early and long-term investing and compounding.

Roth IRAs vs. Traditional IRAs

The Roth IRA is an excellent retirement savings vehicle for younger people. Since their introduction in 1998, Roth IRAs have been garnering respect (and dollars) from knowledgeable investors for the advantages they have over traditional IRAs.

While a traditional IRA allows you to deduct your contributions pre-tax, it also locks your money in until you are 59½ years old (unless you feel like paying a 10% fee on withdrawals, plus federal taxes), and forces you to take distributions upon reaching the age of 70½, paying federal taxes at your future — and possibly higher — tax rate.

In contrast, when contributing to a Roth IRA, you invest with after-tax dollars now and can withdraw funds tax-free after the age of 59½ or if you meet other IRS qualifications (for instance, if the distributions will be used for a first-time home purchase or to help with a disability).

Once you do hit retirement, there is no requirement on distributions — if you don't feel like taking money out, you can leave it in there to continue growing.

So why are these great starter investments for teenagers or young adults?

The Power of Compounding

Simple: Taxes and the power of compounding. If your child is only working for the summer, or just starting their professional career, they will likely be in one of the lowest tax brackets, making it a fantastic deal to pay taxes on their retirement savings now as opposed to when they are older and in a higher bracket.

The power of compounding — i.e., the act of generating earnings from previous earnings — is what makes any kind of tax-deferred investment a superb bargain.

Let's take a look at an example…