Liz Weston: Make your teen a millionaire this summer
"Initially we started with
Even if no further contributions are made, both sons could see their accounts top
Financial planners know that
?The kids must have earned income from real work. That includes reasonable wages or income from self-employment. The Roth contribution can't be more than their total earnings for the year, up to
?Kids under 18 need a custodial Roth. Not all brokerages have attractive options for small accounts. Fidelity and Schwab, however, offer custodial retirement accounts with no opening or maintenance fees. Fidelity has no minimum, while Schwab requires at least
Why a Roth rather than a traditional IRA? Low-wage workers pay little if any income tax, so they don't get much value from tax deductions, including deductible contributions to a traditional IRA. When a big upfront tax break isn't available, it makes sense to contribute instead to a Roth. Contributions aren't deductible, but withdrawals in retirement are tax-free.
Another important note: Retirement accounts aren't included in federal financial aid formulas, so a child's Roth won't affect financial aid offers from most schools. Some private schools, however, do consider custodial Roths when calculating their offers, says college financing expert
HOW ROTH IRAS WORK
The ability to contribute to a Roth starts to phase out above certain modified adjusted gross income levels. For 2017, the phase-out begins at
That's not an issue most kids have to worry about. Let's say your daughter works 30 hours a week for the federal minimum wage of
Obviously, she won't net
That far in the future,
You can talk about that with her as you're setting up her Roth. Together you should also:
—Review her investment options. Fees can devastate small accounts and dramatically lower the amount she can accumulate over decades, so low-cost index funds or exchange-traded funds might be a good choice.
—Discuss the temptations for tapping the money. Technically, she can withdraw an amount equal to the contributions at any time without paying taxes or penalties. She also can withdraw up to
—Underline the payoff for leaving the money alone to grow. The best use of retirement money is for retirement, and it can grow to seven figures only if she keeps her mitts off it.
"Parents could use this to teach a valuable lesson in delaying gratification and building investments over time," says
This column was provided to The Associated Press by the personal finance website
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