As a parent, you should be thinking about retirement for teens because…
Time is Money.
Start contributing to retirement when you’re a teen, and you have time on your side. But is it unrealistic to expect a teenager to understand the value of saving money for retirement?
Possibly. After all, what kind of tax deduction does a teenager need.
However, the more positive exposure a teenager has to savings – retirement or otherwise, the more likely they will be receptive to it. And who wouldn’t be responsive to becoming a millionaire?
If convincing your teen to start saving for retirement is overwhelming, consider contributing to a Roth IRA on their behalf.
Can a Parent Contribute to a Child’s Roth IRA?
Retirement for teens may not be something your child will consider doing on their own, but you can help get them started by providing them the cash to do so.
So long as your child earns an income, they can contribute to a Roth IRA. You can gift the money to your child to deposit into an IRA account under their name as long as it meets two requirements.
- It doesn’t exceed the child’s earned income, and
- It doesn’t exceed the maximum annual contribution, which is $6,000 for 2019.
What Are the Tax Implications?
There are potential tax implications to gifting money to your child. If your gift exceeds the annual gift-tax exclusion, you may be subject to gift tax.
In 2019, the gift tax exclusion is $15,000. You can contribute up to this amount to any one individual without triggering any federal gift taxes.
Retirement for Teens – Make it a Learning Opportunity
Consider this scenario: If your child contributes $2,000 per year, each year into a Roth IRA and earns a modest 7% return, that investment will grow to $1,000,460.64 by the time they turn 67.
Make this a fun learning opportunity. Help them gain a vested interest in the performance of their investments. Allow your teen to pick the stocks they want to invest their money into.
Create regular check-in points to see how much their investment has earned based on compound interest.
Help them to establish a habit of savings. Find fun ways to increase contributions up to the legal limit. For example, offer to match what they contribute. This is similar to the 401k match many employers provide. Beyond learning about compound interest, and creating an opportunity for them to become a millionaire, it’s also teaching them how to take advantage of employer-provided benefits.
What About College?
One of the primary financial concerns of any parent is the rising cost of college. Any discretionary income allocated to savings gets prioritized towards college savings. And rightly so.
However, there are benefits of allocating your money towards retirement savings on behalf of your teen beyond the lure of future millionaire status. As long as the money in the Roth has been deposited for five years or more, deposits can be withdrawn for qualified educational expenses before age 59 1/2 without penalty. Earnings are taxed at ordinary tax rates.
How are you helping your teen learn the value of retirement savings? Share it with us in the comments below.