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How to Start a Teenager's Retirement Planning Earlier

| December 16, 2019
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A Roth IRA is something millions of current and future retirees have been using for as long as they’ve been offered. It’s an efficient way to put away earned income after tax rather than a traditional IRA which offers the ability to defer tax on some of your earnings. Many of our clients enjoy the idea that their investment is growing after tax within their ROTH IRA. This has a compounding effect over time and is certainly helpful once they reach the withdrawal stage of their retirement planning. Each year your ROTH IRA has the potential to grow, this growth is tax free each year and when you take qualified withdrawals.  We always like to stress that it is never too late to start saving for your retirement goal.

What many perhaps don’t realize is that the same principle applies in the reverse: it’s never too early either! In the last few years what is called a “kiddie Roth” has become more commonplace. It allows an investor to help their minor children begin saving much earlier than is typical. The child still needs earned income in order for it to work and possibly put away a small portion of the earnings from their summer or weekend job.  This allows them to possibly earn compounded growth earlier than would typically occur to an investor. Fidelity for example recently ran a study that showed starting at age 15 instead of age 25 with a maximum Roth contribution and saving until age 70, thus allowing 10 extra years to grow provides a nearly $1,000,000 retirement target. This is $500,000 more than starting at age 25. Helping your child save now can have a huge impact on their lives, that’s why we see parents offer to contribute on their children’s behalf in this way when they have a small income of their own.
The benefits to the parent or donor are that they retain control until the minor comes of age. The account is for the minors benefit much the same way as a 529 college savings plan or Uniform Trust (or Gifts) to Minors (UGMA or UTMA) accounts are. The adult receives all communication and statements. Additionally they exercise their discretion over the account, allowing them to make any contributions as they choose. It retains the same early withdrawal penalties as a ROTH IRA, however the exceptions can be quite beneficial such as for a first time home purchase or college tuition. Some could see this as a good supplement to their 529 college savings plan for their children, grandchildren, nieces, nephews or any child they love and want to see succeed.
If you would like to help your minor child, grandchild or family member get a critical head start on their retirement after their first job, it is certainly not too early. Give us a call and we would love to discuss with you the Kiddie Roth and any number of ways to start saving and meeting your family’s financial planning goals.
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