Funding a Roth IRA for your child or grandchild
Millions of high school and college aged children will have jobs this summer. This presents an opportunity to establish a retirement account in their name. It can help instill a lifelong saving habit and you can help them get started with a contribution. As long as they have earned income, they are able to contribute to a Roth IRA for 2019 and can contribute a portion or most of their limited income. Yes, kids saving for a time 50 years later may seem absurd to them, but as you know, there are many benefits to starting early.
What is a Roth IRA?
A Roth IRA is the most tax advantaged retirement account. Contributions are made after-tax but all the growth in earnings (dividends and price appreciation) can be withdrawn tax free after age 59.5.
How much can be contributed?
For 2019, you can contribute $6,000 but not more than the child’s earnings for the year. For example, if they make $2,500 this summer, they can contribute $2,500. If they make $8,000, then they can contribute $6,000. The child doesn’t have to deposit the money with their own hard-earned dollars. You can contribute for them, though it counts toward your annual $15,000 gift tax exclusion ($30,000 if married).
Why is this important?
Two words: compound interest. A $6,000 contribution today growing at an 8% annual growth rate would be equal to $281,000 in 50 years. Let’s say they made four contributions for the four summers of college, then that grows to $1,006,000 in 50 years. There is a retirement crisis in this country, and this would help set them on strong financial footing for the years ahead. Don’t you wish you had the foresight to do this yourself 40/50/60+ years ago (or wish your parents or grandparents had)?
What else do I need to know?
With Roth IRAs, any contribution can be withdrawn free of tax at any time. Just don’t withdraw the earnings since that results in a stiff penalty. Another benefit is available for first time home buyers. $10,000 of earnings can be withdrawn free of tax along with any of the contributions.
Summer is coming! Consider giving a gift of a Roth IRA for your working teen or college-aged child or grandchild and set them on the right path to plan for their later years. If you’d like our assistance in getting this started, please call.