GOLDEN VALLEY, Minn. - It's not unusual for kids to work a summer job for some extra cash, saving up for something special. But what may be less common is seeing them fund a Roth IRA with some of those earned dollars. Parents can help their kids accomplish this great retirement savings move. Dan Ament, Financial Advisor with Morgan Stanley Wealth Management in Wayzata joined KARE Sunrise to explain.
Why Your Kids Need A Roth IRA
Roth Contribution Basics - All that's required to make a Roth contribution is having some earned income for the year. So if your child earns some cash from a summer job, or part-time work after school -- or whatever really - they are generally entitled to make a Roth contribution. For the 2012 tax year, your child can contribute the lesser of: (1) earned income or (2) $5,000. These contirbutions may be made up to the April tax filing deadline in 2013 for the year 2012.
It doesn't have to be their money - If you are feeling generous be mindful that if your child spent all their new found cash you are able to make the Roth IRA contribution for them. The maximum still stands as described above, earned income or $5,000, whichever is less.
A Look what the future may bring - By making Roth contributions for just a few years during his or her teenage years, your child can potentially accumulate a good sum of money by retirement age.
* Say your 15-year-old pays $1,000 into a Roth IRA each year for three years, starting this year. After 45 years (when your gray-haired "kid" is 60), the account would be worth over $25,000 -- assuming a 5% annual rate of return. If you assume a more-optimistic 8% return, the account would be worth just under $89,000.
* If your kid contributes $2,500 for each of the three years. With a 5% return, the Roth account would be worth about $64,000 in 45 years. At 8%, the number jumps to a whopping $222,000.
* If a1,500 contribution was made each year beginning at age 15 for 45 years, with a 5% rate of return, the Roth account would be worth about $239,000 at age 60.
You can tap it if you need to - Unlike traditional IRA balances, you are allowed to withdraw your principle contributions at any time without penalty should you need to. This may allow you to consider this bucket of money as your 'emergency fund'.
Bottom Line? Encouraging your working kid to make Roth IRA contributions is a great way to introduce the ideas of saving and investing for the future. Plus there are tax advantages. It's never too soon for your child to learn about taxes and how to legally minimize them.