During a client meeting in our office last week, we talked about how they – parents of young adult kids (in their 20s and young 30s) – could help the kids get onto a sturdier financial footing without killing their own initiative or enabling them.
We’ve written about this a lot, but it’s always worth repeating because it’s so important.
Probably the #1 way you can help your young adult kids, or grandkids, is to encourage them to set up a Roth IRA.
In the case of our clients, we offered to help the kids set up Roth IRA accounts in their names.
As long as they have working income, even from a summer or casual job, they can contribute up to $6,000 (or the amount of earnings – whichever is less) to the account each year. The maximum contribution amount tends to rise each year with inflation. Unlike a Traditional IRA, there is no immediate tax deduction for putting money into the account, but under current law the funds will grow forever free-of-tax.
It’s compounding magic. Regular Roth IRA contributions started by working teens and extending to retirement have the potential to grow to over $1.7 million dollars. But without a nudge (or two), many young workers tend to procrastinate when it comes to saving for the future. Starting later can cut their potential earnings dramatically. Moral of the story: Get started right now.
See our previous article “How Your Kids Can Be Millionaires By Retirement”
Your kids can contribute all their own money, or you can help them by matching what they save (although the amount of the Roth contribution cannot exceed $6,000 per year, it does not all have to be their money).
Here’s the point. These fairly small contributions over time can grow to be truly enormous sums. And best of all, your child or grandchild can always withdraw the contributions without tax or penalty, at any age, if needed for emergency medical expenses, a house downpayment, or any other purpose.
- Kids of any age can set up their own Roth as long as they have earned (working) income. Minors with working income can open a Roth Custodial account that will convert to an account in their name once they become adults.
- These accounts are free to set up. Large discount brokers like Schwab or Fidelity will usually offer the widest range of inexpensive investment options and free online tools.
- Covered by a 401(k) at work? Lucky you. But you can still open a Roth.
- The account holder has until next tax date (April 15, 2020) to contribute for 2019. Tip: Don’t wait until then. Make your contribution as soon as you have funds available. Why let it sit in a bank account earning nothing if you can get it working inside a Roth?
- Clients: Give us a call with your questions. Or better yet, have the kids call us directly. 😎