Summer Vacation: Get Back to Work!

Financial PlanningGeneralRetirementSaving
Summer Vacation: Get Back to Work!

SCHOOL’S OUT! The final bell rings throughout the building as jubilant children gleefully skip down the halls and out the door. Summer is here, which means beach trips, amusement parks, ice cream cones, and…saving for retirement? Although retirement is likely the last item on the mind of the recently “liberated” student, those of us who are a bit more “mature in years” know the value of starting to save for retirement as early as possible. The Roth IRA is one of the most powerful tax-advantaged retirement saving vehicles in existence, and minors can save into a Roth IRA using income from their odd jobs, even if they do not receive a W2 form.

Just because someone is under 18, it does not mean they are too young for an IRA. Although you need to be 18 to set up a Roth in your own name, a parent or grandparent can be named a custodian on a Roth IRA set up for a child or grandchild. When the child reaches the age of majority, the Roth IRA will be owned exclusively by the child. The only catch is the child must have earned income for that year. The maximum contribution amount to a Roth IRA is the lesser of $6,500 or the child’s earned income. This means that if a child earns $2,500 mowing lawns and walking dogs, the maximum they can contribute is $2,500.

Frankly, you would be hard pressed to find too many students willing to part with their summer cash by placing it into a Roth IRA. Most children would prefer the instant gratification of having the next generation of the Oculus or PlayStation. If a child is unwilling to contribute his or her earnings, a parent, grandparent, or other relative could always gift it to a Roth for them! For example, if a child earns $3,000 mowing lawns, a parent (or anyone else) can contribute $3,000 dollars of their own money to the child’s Roth IRA as a gift. In this case, not only is the student able to buy a rusty old jalopy to drive around in, but they can jumpstart their retirement savings by $3,000 through the gift.

Another concept to consider is “matching” contributions that child makes to the Roth IRA. If the child is willing to contribute $500 of $2,500 earnings for the summer, consider matching that $500. Think of it as teaching your child the benefits of saving in a future 401(k) plan, as well as helping them get ahead of their peers when it comes to retirement.

Some may be concerned about the tax complications of having a minor contribute to a Roth IRA without a W2, especially if the child would not otherwise file taxes individually. Fear not! In the vast majority of cases, if the child would not have to file taxes individually, contributing to a Roth IRA will not trigger a need to file. The maximum that an unmarried minor can make without filing a tax return is $12,950. If they are making less than this, they do not need to file a tax return, whether they contribute to a Roth IRA or not.

Setting up a Roth IRA for children is a powerful way to jumpstart their retirement savings. If a child has earned income for the year, then he/she is permitted to contribute the lesser of this amount or $6,500 dollars to a Roth IRA that their parents set up for them. The younger an individual begins saving for retirement, the more years that account has time to grow. At a 7% rate of return, the $2,000 your child saves at age 12 will be approximately $58,000 when they are 62 and beginning to think about retirement. Maybe you should wait a couple days after that final bell to break the news, but encourage your child to work over the summer not only for some extra cash, but also to jumpstart their retirement savings.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

Let our professional financial advisors help you achieve the legacy you desire for yourself, loved ones, and organizations. Contact Us