Many of our children are already in the work force. With all the technology out there, it’s as expensive as ever to please your kids so more and more kids are getting jobs earlier. These include summer jobs, weekend jobs and even mowing lawns. As long as your child is making money, they can invest in their future. For 2013, they can invest up to $5,500 or the amount of their earned income, whichever is less, into an IRA.
While they can invest in a traditional IRA, the better move is for them to open up a Roth IRA. The taxes they would pay right now are going to be a lot less than in the future when they start making “real” money. It will be hard to get your kids to invest at such a young age, so you just enlighten them with some facts. Here are a few examples of what just three years of investing starting at 15 can turn into:
If they contribute $1,000 each year, they would have $25,000 at a 5% rate of return and $89,000 at an 8% rate when they reach 65 years of age.
If they up to $1,500, they would have $38,000 at 5% and $132,000 at 8%.
Finally, if they contribute $2,500, the 5% return would be $64,000 and $222,000 at 8%.
Obviously, the more they put in and the longer they contribute, the more they will accumulate for retirement.
There is another reasons to choose a Roth over a traditional IRA. Any contributions made into a Roth can be withdrawn income tax and penalty-free at any time. While it’s never good to withdraw from your retirement plan, it’s nice to have that flexibility. If you tried that with a traditional IRA, you would owe the taxes and be hit with a 10% penalty.
It can be hard to convince your child to save his or her money so one plan may be to help him or her out. You can match any money your child contributes. If you’re looking to set up your child with a Roth IRA, there’s no better people to talk to than the tax experts at the IRA Financial Group. Give us a call at 800.472.0646 or visit our website today!