Match Your Child’s IRA Contributions to Stimulate Savings
We’ve previously written about why you should encourage your child to start a Roth IRA – they can start accumulating savings from an early age, capitalizing on savings and learning about saving and investing along the way.
However, to sweeten the deal, consider adding “employer matching” to your child’s contribution: match them dollar for dollar or whatever you like to stimulate more savings.
For a child to open / contribute to Roth, they must have earned income. But you can donate money to Roth separately from that.
“Your contribution to your child’s Roth IRA can be a gift from you or someone else,” says RothIRA.com . “Be sure to consider the IRS gift tax rules. Contributions you make to the Roth IRA for your child will count towards the $ 15,000 limit on tax-free gifts you can give to one person for 2018 and 2019. ” If you donate less than this amount, you will not have to issue tax documents. The IRS Gift Guide is here (and the 2019 IRA contribution limit is $ 6,000).
Alternatively, you can fully subsidize their contributions (such as babysitting, housework, or other after-school work).
Roth is ideal for children due to the long time frame in which investments will have to grow and the fact that incomes will grow tax-free. In Consumer Reports, this breaks down:
Let’s say you give $ 500 annually for five years, which is invested in a Roth IRA, and your account grows at a conservative annual rate of return of 4 percent . This $ 2,500 investment will grow to over $ 16,000 in 45 years. If the bill grows 6 percent year over year, it will cost almost $ 40,000.
As CR also points out, “matching” contributions should not be received free of charge. You will want to talk to your child about the importance of saving and investing and explain why they should not just cash out their account when they think they need to. These will be valuable lessons indeed.