Did your teen pull down a paycheck last summer or during the school year?
Then, it’s time for you to establish a Family 401(k).
Here’s the quick recipe:
- Open a Roth IRA account for your teen (custodial account if under 18).
- Contribute up to the max possible. That’s usually the total of what your teen brought home since most earn less than $5,500 (or whatever the current IRS Roth contribution limit is).
- Invest in a low cost index fund. VTI is my personal go-to choice.
- Review, rinse and repeat each year.
Decades from now, your adult child will be sitting on a sizable nest egg — even if your kid falls off the contribution wagon during young adulthood. Compounding over the long haul is that powerful.
But there’s one big problem, you say.
It’s step #2. Your teen already blew all those paychecks on fast food, online games, and streaming music. There’s no money left over to contribute.
Just gift the contribution money to your teen. If you can’t cover it, hit up the grandparents, aunts and uncles.
Huh? Why should you just hand over free Roth contributions to your teen? Isn’t that sending all the wrong messages?
Not in my book. Think about it.
Even if you as the parent gift the entire contribution, here’s why it’s a neat way to pass money to your kids while signaling all the right messages:
- It’s contingent on getting a job and bringing home a paycheck.
- It shows the power of patient investing and tax free growth.
- It’s a great excuse to talk to your kid about investing every year.
- It increases the probability your child will quickly jump on future matching opportunities, like an employee 401(k) plan.
- It puts your kid solidly on the path to a financially independent future.
The bottom line: funding (and even fully funding) your teen’s Roth IRA now is a lot healthier than plopping a large lump sum in your kid’s lap later when you kick the bucket.
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This is great! Gotta teach them while they're still under your wing!ReplyDelete
Could they also withdraw the contributions tax free for college?ReplyDelete
Ian, this article on Roth IRA withdrawal rules might be helpful (along with a discussion with your tax professional - which I am not!): http://www.rothira.com/roth-ira-withdrawal-rulesReplyDelete
That said, be sure to check out 529s for college savings too.
I like this idea but have perhaps another thought especially if may be like me n don't have that kind d of $ nor grandparents etc.. I am thinking to have them contribute to the Roth and/ or when get $ back from taxes have them put that $ into the Roth. My daughter will be 18 so that just might be a win/win.ReplyDelete
Yes, that's an excellent way to deploy a tax refund! http://www.familyfinancefavs.com/2016/01/teen-tax-refund-in-roth-ira-with-parent-match.htmlReplyDelete