Introducing Your Child to the Roth IRA: A Lesson in Long-Term Financial Growth

When it comes to personal finance, the adage holds true: it’s all about time in the market, not timing the market. And what better way to set your kids on the path to financial security than by introducing them to the power of a custodial Roth IRA? Spring is a great opportunity to talk to your teens as they embark on a summer job. However, before you dive in, let’s talk about a few important items about Roth IRAs and custodial accounts:

  1. Tax Advantage: Unlike Traditional IRAs, Roth accounts are funded with after-tax dollars, meaning that any gains grow tax-free. Over the long term, this means your child pays less taxes to Uncle Sam.  
  2. Custodial Management: Keep in mind that minors cannot open their own Roth IRA, so a parent or another adult must oversee the custodial account until the child reaches legal age.
  3. Investment Decision: While a Roth IRA offers tax advantages, it’s key to remember that it’s savings vehicle. This means you’ll need to take the driver’s seat and direct where to invest the contributions. This is a crucial step that can be easily missed.
  4. Contributions: Your child can contribute to the Roth IRA as long as they have earned income. If they land their first summer job this year, it’s an excellent opportunity to encourage savings. Consider offering to match their contributions, up to the IRS limits, which for 2024 is $7,000.

Earlier, we emphasized the importance of time in the market. Let’s run some numbers and see how this can play out. Imagine your child earns $1,000 from a summer job, and you encourage them to contribute it to their Roth IRA. Let’s assume they make no further contributions but let the money grow over 49 years until they reach 65. With a conservative 7% rate of return compounded annually, their account would balloon to $27,529.93—tax-free! On the flip side, if the same amount sat in a savings account earning a mere 0.50% interest, they’d end up with just $1,276.84.

So, this summer, if your child gets a job, consider helping them open a Roth IRA and make contributions. Turn it into a fun and great learning experience by matching their contributions. Remember, the key is to help your child establish a mindset of long-term investing, not trying to time the market’s ups and downs. It’s a gift that will keep on giving for decades to come.

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