Preparing for retirement may be on your mind – and it should be. But have you thought about helping prepare your kids or grandkids for their retirement? Setting up a Roth individual retirement account for your teen can be a smart and rewarding move to consider at tax time, and you don’t have to be wealthy to do it.
High-school students with earnings from a summer job or babysitting probably aren't thinking of putting money away for decades. But you might plant the retirement-planning idea by funding a small Roth IRA for the teen—or by offering to match or put aside $2 or $3 for every $1 of taxable income the teen contributes.
There's no deduction for funding a Roth, but it differs from a traditional IRA in that you contribute with after-tax money but pay no taxes on withdrawals, meaning all growth is tax-free. A teenager working part-time will have one of the lowest tax rates, making it a good trade-off to pay taxes on contributions now rather than at retirement when the total and the tax rate will be much higher. And for your teen, that means decades of earning interest on interest which can result in a nice nest egg when they are ready to retire.
There are some requirements to establish and contribute to an IRA for your teen:
- The teen must have income from a job – allowances, even for chores around the house, don’t count.
- The IRA contribution can be as much as the teen's taxable pay from work in a given year or $5,000, whichever is less.
- The account can be set up and funded as late as the tax-filing deadline – April 15th.
If you are self-employed, you can employ your children, pay them a salary and open a Roth on their behalf. Just make sure they do real work for a reasonable wage and you file W-2 forms reporting their earnings to the Social Security Administration.
Even with all of the benefits, it may be challenging to convince your teen to save now for retirement that is decades away. It may help to share what you have done towards your own retirement – good planning or poor. It also helps to paint a picture by providing some examples of what putting a certain amount away now and contributing to it over the years may mean in terms of real dollars for their future.
If you have questions about how best to help your teen (or you yourself) prepare for retirement, please contact us.
