Tuesday, February 13, 2018

Pop Up A Family 401(k) In Five Easy Steps

Pop Up A Family 401(k) In Five Easy Steps

Chris loves personal finance. Of course he does. He’s an accountant.

But he hates all the complexity and technical jargon that prevents “normal” people from taking action.

For example:

I’d like to see every eligible W2 earner make a non-tax deductible contribution in the amount that is the lesser of one’s taxable earned compensation (not adjusted gross income) and the allowable limit set by the IRS as dictated by age and subject to certain modified adjusted gross income limits into a Roth individual retirement account established by the Taxpayer Relief Act of 1997 in the first allowable year and every allowable year thereafter to grow tax-free in a passive, low cost, broad market index fund until age 59.5.

What the...?

That’s exactly the kind of techno-jargon Chris laments. He’d prefer to present personal finance topics simply and briefly. That’s why he created the short-form podcast Popcorn Finance.

So, what I meant to say was:

I want all parents to set up Family 401(k)s for their working teens. Pronto.

Why? It will save their financial lives.

What’s a Family 401(k)?

Grab a bag of popcorn, kick back, and fire up episode 43 of Popcorn Finance.

Chris and I break down the Family 401(k) into 5 easy steps. Listen and you’ll learn my favorite family finance tip in the time it takes you to make — and perhaps eat — a bag of popcorn.

Here’s the cheat sheet:

  1. Get a job. Like a corporate 401(k) deal, the Family 401(k) starts with work. In our family, I insist on a summer or part-time job that issues an official W-2. That way, I know we’ll be in the clear with the IRS.
  2. Open a Roth IRA. Help your working teen open up a Roth IRA account at a reputable broker. I chose Schwab. For teens under 18, you can set up a custodial account.
  3. “Family-source” contributions. So your teen spent the earnings on gaming and pizza already? Time to hit up the grandparents and rich uncle Phil for some cash to contribute to the Roth. See if your teen can "family-source" enough funds to max out the contribution.
  4. Invest. Don’t let the funds wallow in cash. I like a low cost all-market index fund like VTI for the long term win. Don’t try to time the market either. You can’t.
  5. Rinse and repeat. Keep doing this every year whenever eligible. Congratulations, now your teen knows the wisdom of dollar cost averaging. Oooh, fancy jargon!

After decades in the market with steady contributions enjoying tax-free growth, your teen’s gonna be sitting pretty on a sweet retirement stash come age 59 and a half.

Which brings us to Chris’ bonus step: Step 6. It’s the ultimate parental payback. It’s like the butter on the popcorn.

Listen here to find out what it is. It’s only 10 minutes long. Pop. Pop. Pop.

Want to turn these tips into action? Check out FamZoo.com.