You started early and have saved hard in your 401(k). You’ve also paid close attention to your investing strategy over the years. And you definitely understand the benefits of tax-deferred compounding over the long term and the potential for growth. Heck, you’ve even remembered to change your account password every 90 days. Maybe now it’s time to pay it forward and pass along some of your retirement savings wisdom and teach a younger generation!
A Roth individual retirement account (IRA) may be a great way to instill the value of investing for a child or teenager with earned income (or grandchild, niece or nephew for that matter). This income could be from a dog-walking or babysitting job, regularly scheduled household chores or from a job that provides a W-2 form.1
The account is managed by a parent or another adult, such as a grandparent or uncle, on behalf of the child. The contribution limit for a Roth IRA in 2023 is the lesser of $6,500 or your child’s total compensation for the year.
Once your child has earned income, it doesn’t matter where the IRA contributions come from. You may be able to entice your child to open an account by offering matching contributions from you or a grandparent or by funding the account up to the allowable amount. That way they will still have money left from their paycheck to go shopping or out with friends.
Once the Roth IRA is open for a minor, all assets are managed by the custodian until the child reaches age 18 (or 21 in some states). Given the tax bracket most teens are in, and the length of time they have to invest, a Roth IRA may provide the most potential long-term financial gain. Because of this, it’s important to stress to your child that using the money to help fund their retirement will likely be their most advantageous option. However, contributions are available anytime and withdrawals of earnings can be made penalty-free in some circumstances prior to age 59½. For example:
• Your child can withdraw money for college, to open a business or for other expenses.
• In addition, your child can withdraw up to $10,000 worth of earnings from the IRA, without a penalty, for the purchase of their first home.
The most powerful benefit of a Roth custodial IRA may be the potential for personal growth for a child or teenager. Getting an early taste of working life, in addition to learning about money and the power of saving, can be invaluable.
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This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
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Do you work for yourself? Then you may want to consider the solo 401(k), which marries a traditional employee retirement savings account to a small-business, profit-sharing plan. To have a solo 401(k), you must either be the lone worker at your business or its only full-time employee.1
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