Summer is Here! Start a Roth IRA for Your Child or Grandchild

As many high school and college students are working summer jobs, now is the perfect time to help them open a Roth IRA. This not only teaches them the value of saving but also sets them up for long-term financial success. As long as they have earned income, they can contribute to a Roth IRA in 2024, making the most of their summer earnings. While saving for retirement may seem far off to them, the benefits of starting early are undeniable.

What is a Roth IRA?

A Roth IRA is a powerful retirement savings tool. Contributions are made with after-tax dollars, but the account's growth and earnings can be withdrawn tax-free once they reach age 59½. This makes it an excellent way to build a tax-free retirement nest egg.

Roth IRA Contribution Limits for 2024

In 2024, the contribution limit for a Roth IRA is $7,000, or the total amount of the child’s earned income for the year, whichever is less. For example, if your child earns $3,000 this summer, they can contribute up to $3,000. If they earn $10,000, they can still contribute only $7,000. You can even make the contribution on their behalf, counting towards your annual gift tax exclusion, which is $18,000 per person or $36,000 for married couples.

The Power of Compound Interest

Starting early with contributions to a Roth IRA allows compound interest to work its magic. A $7,000 contribution today, assuming an 8% annual growth rate, could grow to approximately $328,000 in 50 years. If they contribute for four summers during college, the total could exceed $1,174,000 in 50 years. This early start can significantly alleviate future retirement challenges and provide a solid financial foundation.

Key Benefits to Know

One major advantage of a Roth IRA is that contributions can be withdrawn tax-free at any time, offering flexibility if they need the funds for other purposes. However, it's important to avoid withdrawing the earnings before age 59½ to prevent penalties. Additionally, up to $10,000 of earnings can be used tax-free for a first-time home purchase, alongside any contributions.

As summer is underway, consider setting up a Roth IRA for your working teen or college-aged child or grandchild. This small action can pave the way for their financial security. If you need help getting started, feel free to reach out to us.