Your Teen Working This Summer? Fund Their Roth IRA.
Have a teenager working as camp counselor, mowing lawns, selling ice cream, babysitting or another summer job?
If income is being reported to the IRS, you can open a Roth IRA for Kids in a child’s name to help them save for retirement, qualified educational expenses and introduce personal investing.
Roth IRA for Kids. There is no age minimum, as long as they earn income. It’s up to you to document that they had income earned from work, either W-2 or self-employment taxable wages. Recall a Roth IRA’s tax treatment is most valuable when time horizons are long and current tax rates are low, both are true for kids.
Adult supervision. The account owner is the child, however, an adult maintains control and invests for the benefit of the child. Once a child becomes an adult, usually 18 in most states, the account is transferred.
What if your teen spent their earnings? After a talk about budgeting (i.e. 3 Jars - Spend, Save, Gift), you or a grandparent can set up and fund the Roth IRA up to the amount of your child’s reported earned income.
Some parents make contributions as a ‘match reward’ for money earned in a summer job. Remember, Roth IRA for Kids contributions count against the $15,000 tax-free gifts per individual for 2021. So if you’ve funded $15,000 for child’s 529 Plan, find another individual (i.e. spouse, relative) who can make the contribution.
Introduction to personal investing. Have fun by letting your kid research an ETF or company to invest in, have them explain why and teach how they can follow. The next year, have them choose a different investment with the new contribution. Over time, they have a mix of investments, outcomes and lessons learned.
Taxation of withdrawals before age 59 ½. A Roth IRA allows for 100% of contributions to be taken out at any time and for any reason, with no taxes or penalties. Furthermore, if a Roth IRA withdrawal is for qualified education expenses, you avoid the 10% penalty on earnings but still pay income tax on the earnings. Thus, Roth IRA for Kids could supplement educational savings.
Impact on financial aid? Yes, in a great way. The “expected family contribution” or “EFC” formula has student-owned assets assessed at 20% with two notable exceptions: 529’s at parent’s 5.6% and retirement accounts owned by you or your child are not counted or 0%. However, if a child takes money from a Roth IRA, even to pay for college, up to 50% of the withdrawal may be assessed.
Getting Started. Not all institutions offer Roth IRAs for Kids, but many do with no minimums, no fees and no commissions. Consult your advisor or seek a fee-only CFP to learn more.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.
If income is being reported to the IRS, you can open a Roth IRA for Kids in a child’s name to help them save for retirement, qualified educational expenses and introduce personal investing.
Roth IRA for Kids. There is no age minimum, as long as they earn income. It’s up to you to document that they had income earned from work, either W-2 or self-employment taxable wages. Recall a Roth IRA’s tax treatment is most valuable when time horizons are long and current tax rates are low, both are true for kids.
Adult supervision. The account owner is the child, however, an adult maintains control and invests for the benefit of the child. Once a child becomes an adult, usually 18 in most states, the account is transferred.
What if your teen spent their earnings? After a talk about budgeting (i.e. 3 Jars - Spend, Save, Gift), you or a grandparent can set up and fund the Roth IRA up to the amount of your child’s reported earned income.
Some parents make contributions as a ‘match reward’ for money earned in a summer job. Remember, Roth IRA for Kids contributions count against the $15,000 tax-free gifts per individual for 2021. So if you’ve funded $15,000 for child’s 529 Plan, find another individual (i.e. spouse, relative) who can make the contribution.
Introduction to personal investing. Have fun by letting your kid research an ETF or company to invest in, have them explain why and teach how they can follow. The next year, have them choose a different investment with the new contribution. Over time, they have a mix of investments, outcomes and lessons learned.
Taxation of withdrawals before age 59 ½. A Roth IRA allows for 100% of contributions to be taken out at any time and for any reason, with no taxes or penalties. Furthermore, if a Roth IRA withdrawal is for qualified education expenses, you avoid the 10% penalty on earnings but still pay income tax on the earnings. Thus, Roth IRA for Kids could supplement educational savings.
Impact on financial aid? Yes, in a great way. The “expected family contribution” or “EFC” formula has student-owned assets assessed at 20% with two notable exceptions: 529’s at parent’s 5.6% and retirement accounts owned by you or your child are not counted or 0%. However, if a child takes money from a Roth IRA, even to pay for college, up to 50% of the withdrawal may be assessed.
Getting Started. Not all institutions offer Roth IRAs for Kids, but many do with no minimums, no fees and no commissions. Consult your advisor or seek a fee-only CFP to learn more.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.
