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Help Your Child Kickstart Their Roth IRA

Updated: Apr 19

A little goes a long way in terms of saving for retirement. A Roth IRA is a great way to help your child learn the importance of saving and investing, all while helping you feel more secure about their future. Continue reading to find out more details from our financial planning experts.

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"Roth IRAs are versatile and their money isn’t necessarily locked away until they are in their 60s."

Suppose your teenager just landed a summer job or your college grad finally found a way to pay for their own rent. With disposable income, they may need some helpful advice from you to steer them toward saving for their future. To give them a hands-on lesson in personal finance, you could encourage your little laborer to open and fund a Roth IRA. Parents, grandparents, and even neighbors can invite this behavior by contributing their own money alongside the worker. If you can, offer to match a Roth IRA contribution each year.

Why would a high school student contribute to a Roth? This is a good time to teach your child about the benefits of tax-advantaged accounts. If your 17-year-old puts away $6,000 each year (the 2020 maximum) and receives a hypothetical 7% annual return, the stash will grow to a staggering $2,439,174 by the time he or she is ready to retire at age 67!

All future distributions from a Roth are 100% tax-free. That means no income tax on dividends and no long or short term capital gains. However, you generally have to wait until age 591⁄2 to qualify for this treatment. Some earlier distributions may be wholly or partially tax-free under certain circumstances, i.e. buying/rebuilding a first home, or having a permanent disability.

Roth IRAs are versatile and their money isn’t necessarily locked away until they are in their 60s. For example, if the need for the money arises, contributions can be withdrawn and spent with zero penalty or fees. This is not the case for any 401k, or traditional IRA.

Finally, if you want to spoil your little angel, you can give them a cash gift for the entire amount of the Roth contribution. This is perfectly legal as long as the child has more taxable earnings than the amount of the gift. Plus, there's no gift tax liability or paperwork needed because the maximum IRA contribution is less than the $15,000 a year you can give without tax liability.

Don’t we all wish our parents or grandparents gave us the inside scoop on saving for our future? The best time to start is now, as contributions for 2019 can still be made to a Roth account opened today. Beware: this opportunity ends on 7/15/2020, the income tax deadline. They can contribute $6,000 for 2019 and $6,000 for 2020 right away!

So, don’t hug them yet, just help them. Plant the seed and ask your advisor to help open a Roth IRA account today.

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