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As you read this, you might be thinking, “Summer is almost over.
It doesn’t change anything. Believe it or not, it’s not too late to take full advantage of this summer job opportunity. In fact, you probably have until next April to make your final decision.
Unfortunately, most of the time, teens only think of summer jobs in terms of short-term goals, like money for a movie, buying a car, or even school fees.
Those with the future in mind, however, understand the real long-term benefit of a summer job. Teenage income is eligible for IRA contributions, which can generate significant returns when your child retires. For example, saving the maximum annual contribution in a Child IRA ($ 6,000) each year from age 13 to age 18 increases to $ 2 ½ million at age 70 (assuming an annual growth rate of 8%).
It is not rocket science. It’s simple math that anyone can understand.
If it’s that simple, why isn’t everyone doing it?
Retirement advisor Jonathan DeYoe, president of Mindful Money in Berkeley, Calif., Uses this approach. He has two teenagers and he has Roth IRAs in place for each of them. He is one of many finance professionals who grasp the importance of a Child IRA and quickly seized this opportunity for their own children.
Still, DeYoe notes that many parents don’t for a variety of reasons. “They are bad enough to fund their own IRAs,” he says, “and they don’t know it’s an option.” Further, he adds, “their advisers don’t think very long term (or don’t understand the incredible power of Roth IRA funding for a 12-year-old, or 60 years of funding).
Understandably, the 7-figure retirement growth at age 70 sounds incredible even to you, but you might be concerned that that pot of gold at the end of the Rainbow Child IRA is too far into the future. far away to attract your child. Do not worry. Most kids are impressed with 5-digit dollar amounts, and it is achievable in a short period of time.
Speed is essential for the lesson to be successful. The Child IRA is quickly becoming an educational tool (regardless of your child’s age).
“They are discovering the power of savings and the power of capitalization,” says Arvind Ven, CEO of Capital V Group in Cupertino, Calif. “If they can learn the discipline through deferred gratification, that will be an added bonus. If the funds even consist of single-digit percentages on average each year, they might have a seven-digit nest egg (tax-exempt if it’s a Roth) in retirement.
While you shouldn’t overlook the growing aspect of using your teen’s summer income to start funding a Child IRA, these vehicles offer many other rewards.
“There are many benefits for young people to create Child IRA accounts,” says Jason Field, financial advisor at Van Leeuwen & Company in Princeton, New Jersey. “These types of accounts are great for introducing kids to the world of investing and teaching them how to earn and save money for long term goals. Traditional IRAs can offer current tax deductions if the child files a tax return, and Roth IRAs can offer tax-free growth and no minimum distribution required.
Many parents enjoy opening bank accounts for their young children to introduce them to the wonderful world of high finance. In fact, banks often offer special “children’s savings accounts” to encourage this.
Children’s IRAs, on the other hand, give a more powerful punch to the goal of teaching your kids what they need to learn about money. And unlike a traditional savings or bank checking account, they naturally limit premature withdrawals. Parents who are concerned about the discipline of their child’s spending might find this appealing.
“Children’s IRAs are great savings vehicles for teens,” says Jazmin Gabriela Carpenter, vice president of investments at Wedbush Securities in Los Angeles. “Their youth and the decades they have ahead of them give them a huge investment advantage. It can provide them with valuable financial lessons such as earning, saving, and spending, which is a component of financial literacy. Let’s not forget the important lesson of composition which, for their age, works best because they have time on their side. Another advantage is that they could use the funds for other large expenses such as education expenses (they will have to pay income taxes, but there is no early withdrawal penalty of 10% if money is used for qualifying education expenses like tuition, books and supplies), or to buy a house (they can withdraw funds to use as a down payment or for closing costs before they turn 59 years and a half). The maximum that may be withdrawn for this purpose is $ 10,000.00. These early withdrawals are exempt from penalties and taxes. However, it is always recommended to keep these funds intact, if possible. “
So how does the teenager set up an IRA to contribute that summer income?
Well, there is bad news for teens seeking independence. They cannot do it alone.
“To open a Child IRA, a parent, guardian or other adult will need to open the account on behalf of a minor,” says Tiffany Lam-Balfour, investment and retirement specialist at NerdWallet in San Francisco.
When you set up this child IRA, you need to decide whether it is a traditional tax-deferred IRA or an after-tax Roth IRA. For most teens, one option is a clear winner.
“When it comes to setting up an IRA for a working child, I would hands down recommend a Roth IRA over a traditional IRA,” says Mike Cocco, finance professional at Equitable Advisors in Nutley, New Jersey. . “Roth IRAs don’t benefit from a tax deduction up front, but that’s okay! Most teens or students can have such a low income that they pay little or no income tax anyway, so the tax deduction may be meaningless. However, Roth IRAs grow tax-deferred, so you don’t have to declare dividends and interest each year on their taxes like a normal investment account. And they’re also tax-exempt (even earnings!) If they keep it until they’re 59 and a half … so after decades of saving and investing, those earnings can be quite substantial and potentially accessible tax-free.
Whatever type of job your teenager has this summer, don’t miss this (literally) unique opportunity to start building a valuable financial education as well as a good, solid foundation for a successful and relaxed retirement.
“Setting up an IRA helps jumpstart teenage retirement accounts and also helps develop healthy investing habits,” says Nicklas Norvell, wealth management advisor and chief of staff at Croak Asset Management in Toledo. . “I like to see children start young and feel comfortable with the idea of saving and investing before they start making real money. Using a Roth IRA as a youth for future high earners is also an extremely popular strategy.
And remember, it’s not too late. Like any other IRA, you don’t have to contribute this year’s income until next April.
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