Discover the Roth IRA for Your Child
Getting your first job is an important milestone for most teens. Income means they can upgrade their phone, buy those ridiculously expensive sneakers they yearn for, or start saving money for their first car.
Or … save for retirement?
Once children start earning income – whether from local fast food, snow clearing or babysitting – they can start investing in the Roth IRA.
The Roth IRA is a retirement account that allows contributors to invest money that is already taxed. Unlike 401 (k) s and traditional IRAs, when you withdraw money upon retirement, profits are tax-free (as long as you comply with withdrawal requirements ), making them a great vehicle for young investors who are currently on the go. in lower tax categories than they are. will be in the future. And, if some kind of emergency arises, your child can withdraw the contributions made at any time without any penalties (just not earnings).
If you can get your teen to think about what’s far ahead and be disciplined enough to leave money alone, compound interest earned will work in abundance for him. And if they roll their eyes at a simple sentence, let them play with this compound interest calculator (or watch this video to show you how much compound interest adds up ).
I have calculated that an investment of $ 50 a month starting at age 16 (and assuming a return of seven percent) would turn out to be almost $ 250,000 by retirement age. Obviously, they will increase their contributions as they get older, but this is a good start.
Roth IRA Basics
- There is no minimum age for the Roth IRA. You can open it for a child of any age, as long as he has an income.
- The parent needs to open an account as a custodian. When a child turns 18, he / she will become its owner, although the procedure for transferring an invoice to a child may vary from company to company.
- The Roth IRA is more flexible than other retirement accounts because contributions can be withdrawn at any time for any reason (however, investment income may suffer due to income and early allocation taxes).
- There are limits on contributions. They can contribute up to the amount they earned this year, or up to the Roth IRA contribution limit of $ 6,000 in 2019, whichever is less.
- Like all retirement accounts, you / your child needs to invest. Look for low-cost ETFs and mutual funds . This is a great opportunity to talk to your child about risk tolerance , asset allocation , stock market performance, and more.
Where to begin
Cheryl Kruger, a certified financial planner and founder of Growing Fortunes Financial Planners , opened her son’s Roth IRA with Charles Schwab , but she says any low-cost brokerage firm that offers index funds with low fees and no transaction fees will do. There are other online options, such as Betterment , that may be more technologically attractive to teens, she says, but “since I didn’t want my son to constantly check his account balance, I chose a more traditional discount broker. “
Kruger also recommends that you talk about ‘fees’ before opening an account: “If you have no experience with independent IRA / Roth IRA accounts, make sure you ask about the fees for both the investment itself and for holding the account. Some institutions charge an annual fee for small bills. ” Vanguard and Fidelity are great budget options.
To learn more about how and where to open a Roth IRA, here’s a good explanation.
What you need to know about taxes
Krueger says parents will need to complete Form 8606 to show a Roth IRA contribution that is less than the child’s W-2 earnings. “The brokerage firm will not ask for proof of income, it depends on the depositor, regardless of his age, so the taxpayer must ensure that he does not exceed the limits,” says Kruger.
Here’s some more from personal finance writer Ariel O’Shea of Nerdwallet :
Earned income is defined by the IRS as taxable income and wages – money earned from W-2 work or self-employed activities such as babysitting or walking the dogs. (If you want to contribute to your child’s Roth IRA or match your child’s contributions, it’s okay if they have at least the same earnings as the total contribution.)
If your child has a Roth IRA, you can contact a tax professional directly for more information on how to file your tax return correctly.