Does your teen have their own IRA or Roth?

[Anonymous]

Anonymous wrote:I'm confused. If this money isn't taxable (and I cannot see how a $15-year-old's summer salary is), what benefit is a Roth at this point? Why not put it in a no or low fee index fund? There's nothing to lose, and then the money is available to them as young adults to help with a down payment, student loans, etc. I cannot believe any real financial advisor would advise this--only if they're getting a commission on that IRA. Truly, makes no sense to me.

Thats the best part for teens! Their income is usually not enough to be taxable...and once it is in a Roth it will NEVER be taxed. Its a huge benefit for young people and they should take advantage if at all possible.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:This is great for those of you who can swing it - but also, matching money or saving for them so they can keep their earnings as spending money isn't really teaching them about money, though it's certainly setting them up to not have to worry about it in the future.

We need our kids to help pay for car insurance, gas, etc. and also to save for college with their earnings. With our household parental income (which must be much less than a lot of you), I don't think we'll also be able to start retirement accounts at 13.

IDK. 49 yo holder of 30-yr IRA here. Matching absolutely does teach the value of taking advantage of an available match (something so difficult for people to get that 401k rules have changed to make opt-outs required vs opt-ins for this reason).

More than that, though, success managing money is behavioral. What can be taught by providing the money for the investment is: “You are going to do this every year from now on, no matter what.” And that is what I learned and did, through some pretty high water—I kept putting away the $2k, then the $6k, in years when my personal income from all sources was under $25k annually.

My parents’ HHI was never over $125k in early 2000s dollars. They have never “gifted” money for cars, houses, private school education, any of that. Our HHI has never been over $200k. The IRA is now worth more than $1m.

Of course, as the PP said—no mandates. But this is a specific form of teaching that I will prioritize even if that other stuff seems completely out of reach (as it does to us as well).

I’m the pp arguing this doesn’t teach kids about money. It teaches them that parents will give them more money through tax vehicles. Your point about matching is useless if you never get a match. We’re in our 50s and neither of us have ever had one and we’ve both moved around.

When your kid gets a job, it’s just as easy to say, “hey Larla, if your co offers matching that means it’s free money.” That is teaching versus, showing them a statement where you have matched their salary, while they spent all their money.

Sure, any given person may not (statistically speaking, likely will not) get a job with a match. But in that case having formed the habit of retirement saving and the sense of identity around it—that this is just a thing that person does year in and year out, one of the first priorities in the budget and not what happens to “extra money” if there is any—is proportionally even more important. That’s the behavioral part.

Most people can’t, and if you don’t want to for whatever reason that’s your call too. I am just saying that having it done for me did not teach me that my parents were going to give me more money thru various tax-protected vehicles—because they haven’t, which was part of the conversation at the time about opening the IRA.

This makes no logical sense. They haven't formed a habit of retirement savings because they haven't saved the money. The parents gifted it to them. The behavior is the action taken by the parents.

Sure, it's nice to see a big account that your parents gave you, but don't mistake what it is. A gift.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:This is great for those of you who can swing it - but also, matching money or saving for them so they can keep their earnings as spending money isn't really teaching them about money, though it's certainly setting them up to not have to worry about it in the future.

We need our kids to help pay for car insurance, gas, etc. and also to save for college with their earnings. With our household parental income (which must be much less than a lot of you), I don't think we'll also be able to start retirement accounts at 13.

IDK. 49 yo holder of 30-yr IRA here. Matching absolutely does teach the value of taking advantage of an available match (something so difficult for people to get that 401k rules have changed to make opt-outs required vs opt-ins for this reason).

More than that, though, success managing money is behavioral. What can be taught by providing the money for the investment is: “You are going to do this every year from now on, no matter what.” And that is what I learned and did, through some pretty high water—I kept putting away the $2k, then the $6k, in years when my personal income from all sources was under $25k annually.

My parents’ HHI was never over $125k in early 2000s dollars. They have never “gifted” money for cars, houses, private school education, any of that. Our HHI has never been over $200k. The IRA is now worth more than $1m.

Of course, as the PP said—no mandates. But this is a specific form of teaching that I will prioritize even if that other stuff seems completely out of reach (as it does to us as well).

I’m the pp arguing this doesn’t teach kids about money. It teaches them that parents will give them more money through tax vehicles. Your point about matching is useless if you never get a match. We’re in our 50s and neither of us have ever had one and we’ve both moved around.

When your kid gets a job, it’s just as easy to say, “hey Larla, if your co offers matching that means it’s free money.” That is teaching versus, showing them a statement where you have matched their salary, while they spent all their money.

Sure, any given person may not (statistically speaking, likely will not) get a job with a match. But in that case having formed the habit of retirement saving and the sense of identity around it—that this is just a thing that person does year in and year out, one of the first priorities in the budget and not what happens to “extra money” if there is any—is proportionally even more important. That’s the behavioral part.

Most people can’t, and if you don’t want to for whatever reason that’s your call too. I am just saying that having it done for me did not teach me that my parents were going to give me more money thru various tax-protected vehicles—because they haven’t, which was part of the conversation at the time about opening the IRA.

This makes no logical sense. They haven't formed a habit of retirement savings because they haven't saved the money. The parents gifted it to them. The behavior is the action taken by the parents.

Sure, it's nice to see a big account that your parents gave you, but don't mistake what it is. A gift.

DP. My parents started fully funding my IRA when I was in my 20s and the idea of retirement seemed impossibly far away. It was not a financial stretch for them to do it but it was one of the few financial things they discussed with me so it made a huge impression. My parents did not do a lot to help me with expenses after I left home but they were handing over thousands every year for my retirement; it was on my mind as soon as I had kids. We are now fully funding our teen's IRA and discussing it with them. You are right that it is a gift, but if we were not able to fully fund it I think I would try to put some amount in, and/or encourage him to do the same, just to hammer home that it is an important thing to think about and prioritize now.

If you simply can't, and they can't, that's another story, but if they are saving for college they could direct some of that to an IRA. And, to the best of my knowledge, money in IRA is not considered when colleges are looking at financial aid, but parent savings and child savings are considered.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:This is great for those of you who can swing it - but also, matching money or saving for them so they can keep their earnings as spending money isn't really teaching them about money, though it's certainly setting them up to not have to worry about it in the future.

We need our kids to help pay for car insurance, gas, etc. and also to save for college with their earnings. With our household parental income (which must be much less than a lot of you), I don't think we'll also be able to start retirement accounts at 13.

IDK. 49 yo holder of 30-yr IRA here. Matching absolutely does teach the value of taking advantage of an available match (something so difficult for people to get that 401k rules have changed to make opt-outs required vs opt-ins for this reason).

More than that, though, success managing money is behavioral. What can be taught by providing the money for the investment is: “You are going to do this every year from now on, no matter what.” And that is what I learned and did, through some pretty high water—I kept putting away the $2k, then the $6k, in years when my personal income from all sources was under $25k annually.

My parents’ HHI was never over $125k in early 2000s dollars. They have never “gifted” money for cars, houses, private school education, any of that. Our HHI has never been over $200k. The IRA is now worth more than $1m.

Of course, as the PP said—no mandates. But this is a specific form of teaching that I will prioritize even if that other stuff seems completely out of reach (as it does to us as well).

I’m the pp arguing this doesn’t teach kids about money. It teaches them that parents will give them more money through tax vehicles. Your point about matching is useless if you never get a match. We’re in our 50s and neither of us have ever had one and we’ve both moved around.

When your kid gets a job, it’s just as easy to say, “hey Larla, if your co offers matching that means it’s free money.” That is teaching versus, showing them a statement where you have matched their salary, while they spent all their money.

Sure, any given person may not (statistically speaking, likely will not) get a job with a match. But in that case having formed the habit of retirement saving and the sense of identity around it—that this is just a thing that person does year in and year out, one of the first priorities in the budget and not what happens to “extra money” if there is any—is proportionally even more important. That’s the behavioral part.

Most people can’t, and if you don’t want to for whatever reason that’s your call too. I am just saying that having it done for me did not teach me that my parents were going to give me more money thru various tax-protected vehicles—because they haven’t, which was part of the conversation at the time about opening the IRA.

This makes no logical sense. They haven't formed a habit of retirement savings because they haven't saved the money. The parents gifted it to them. The behavior is the action taken by the parents.

Sure, it's nice to see a big account that your parents gave you, but don't mistake what it is. A gift.

Yes—it was a gift that they gave in such a way that it established a habit. They wrote the check to me and said: this is for a retirement account only. I put it in my bank account. They helped me set up the IRA (which at that point had to be done on paper). I wrote the check each month from the bank account to the IRA.

Those are all steps the unfamiliarity of which regularly stop people from developing a habit of saving early in life. So my parents greasing the skids for those habits by providing the money and the guidance was a huge benefit to me.

The biggest benefit was that it meant I didn’t experience the risk as a reason not to start, which is a showstopper for a lot of people.

The total dollars gifted were $12k over 6 years. The habit has been priceless. I think it was one of the smartest parenting moves my parents made and am really grateful to them for it.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I'm confused. If this money isn't taxable (and I cannot see how a $15-year-old's summer salary is), what benefit is a Roth at this point? Why not put it in a no or low fee index fund? There's nothing to lose, and then the money is available to them as young adults to help with a down payment, student loans, etc. I cannot believe any real financial advisor would advise this--only if they're getting a commission on that IRA. Truly, makes no sense to me.

+1 if a teen makes $500-1000 babysitting in cash just keep the cash. In order to do a Roth you’d have to file a tax return for that small amount of money. Seems like overkill.

This is not correct

(DP) It is for self-employed income like babysitting, but not because of the Roth directly. If they earn that much babysitting, they already should be filing tax forms. If they are "self-employed," like teen babysitting, free lance swim lessons, tutoring, etc., they are supposed to report and pay taxes if they earn over $400 per year, and if from one source, then that source should be issuing a 1099 if they are paying the kid more than $600 per year. I'm guessing in practice not everyone files for their kids who earn over the $400 threshold, so a Roth may draw attention if all of the self-employment rules are not being followed.

It is easier to keep appropriate records when it is a job with a W-2, as opposed to self-employment income. Typical teen jobs with W-2 wages don't earn enough to meet the taxable threshold of $12,950 per year for such income, and so those kids don't need to file tax returns. But it is easier to track and prove when you get a W-2. So for every Roth contribution the kids make, they have a W-2 to back it up, even if they do not earn enough to have to file a tax return.

[Anonymous]

For those who are matching, remember that the total contributed to the Roth cannot exceed the kid's actual earnings that year.

[Anonymous]

We opened Roth accounts for our teens as soon as they started earning any money (still just odd jobs for the younger; the older one also has a regular paycheck these days). We match their contributions at 4:1 -- which basically means 100% of their earned income ends up in their Roth accounts and they also keep 80% of what they earn as walking around money. As a practical matter of real world logistics, if one of them makes $100 helping a neighbor move, they'll hand over $20 to us and we'll deposit $100 into their Roth account. It might be easier for us just to fully fund their contributions, and we could do so without feeling any pinch, but I think it's beneficial for them to feel a bit of a bite and have some personal skin in the game. (I probably would have limited our match to 3:1 or 2:1, and spouse probably would have fully funded, so 4:1 is where we are...)

[Anonymous]

Anonymous wrote:

Anonymous wrote:We started Roth IRAs for each kid at 15, as soon as they had earned income.

Same. We also funded them and let our teen keep the money he earned. I imagine we will continue to do so for a while.

+1. Teen is now 18 and has about 10k in Roth (started at 14) and will add $6500 this year. If he earns it, we fund it completely up to the yearly limit. We’ll probably do this through college. A nice little nest egg to start him off for retirement after college.

[Anonymous]

Anonymous wrote:For those who are matching, remember that the total contributed to the Roth cannot exceed the kid's actual earnings that year.

Yeah, a lot of people are skirting the rules around ROTH and IRAs. The reason they are provided with the tax benefits they have is that you are supposed to be earning the money and putting a portion of your own money in. And you certainly shouldn't be putting in more than the kid is making, which it sounds like some of you are. I feel like these people should be setting up an annuity or something instead of cheating at a ROTH contribution.

[Anonymous]

Anonymous wrote:

Anonymous wrote:For those who are matching, remember that the total contributed to the Roth cannot exceed the kid's actual earnings that year.

Yeah, a lot of people are skirting the rules around ROTH and IRAs. The reason they are provided with the tax benefits they have is that you are supposed to be earning the money and putting a portion of your own money in. And you certainly shouldn't be putting in more than the kid is making, which it sounds like some of you are. I feel like these people should be setting up an annuity or something instead of cheating at a ROTH contribution.

I don't think they are. Why do you think that? When people say "matching", i read that as fully funding up to 100% of earned income. Not x2 of earned income.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:For those who are matching, remember that the total contributed to the Roth cannot exceed the kid's actual earnings that year.

Yeah, a lot of people are skirting the rules around ROTH and IRAs. The reason they are provided with the tax benefits they have is that you are supposed to be earning the money and putting a portion of your own money in. And you certainly shouldn't be putting in more than the kid is making, which it sounds like some of you are. I feel like these people should be setting up an annuity or something instead of cheating at a ROTH contribution.

I don't think they are. Why do you think that? When people say "matching", i read that as fully funding up to 100% of earned income. Not x2 of earned income.

This. No one is skirting the rules. Kid earns money. Kid can fund Roth IRA or anyone can fund it on his behalf in an amount equal to earnings up to the annual max. No one said anything about overfunding the account.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:For those who are matching, remember that the total contributed to the Roth cannot exceed the kid's actual earnings that year.

Yeah, a lot of people are skirting the rules around ROTH and IRAs. The reason they are provided with the tax benefits they have is that you are supposed to be earning the money and putting a portion of your own money in. And you certainly shouldn't be putting in more than the kid is making, which it sounds like some of you are. I feel like these people should be setting up an annuity or something instead of cheating at a ROTH contribution.

I don't think they are. Why do you think that? When people say "matching", i read that as fully funding up to 100% of earned income. Not x2 of earned income.

Then that's great. I didn't read it that way. A lot of people were describing earnings from things like babysitting, lawn mowing, etc. that wouldn't have employer-given 1099s or W2s and it sounded like they were just doubling whatever the kid put in without thinking about how much they actually make.

[Anonymous]

No, my teens do not have their own IRA or Roth.

What are doing is contributing to a 529 for funding their college undergrad costs, so they can then get a job that has a 401(K), or they'll be making enough to fund their own retirement savings.

[Anonymous]

Echoing that parents need to understand the rules around Roth IRAs for their kids. A couple of important points that I'm not sure come across in the thread so far:

1) Kids have to have earned income. You can't just start a Roth IRA for them and fund it with gifted money if the kid hasn't earned income that year. That doesn't have to be a formal job with a paycheck -- it can be babysitting or lawnmowing money -- but it's a good idea to have the kid keep a record of money they've earned.

2) You can't exceed what the child has earned in a year. So "matching" only works if the kid is earning the full amount contributed but has kept some of it. So kid earns $1000, they can put $500 in and you can put $500 in, but they can't earn $250 and you put $500 in.

Here's a reader-friendly version of the rules, but always consult the IRS or an outside professional with any questions. You may think you're doing your kids a favor by bending or breaking these rules, but they're the ones who will have to deal with any messes you made by funding their Roth IRAs with contributions in excess of what they actually earned if they get flagged.

[Anonymous]

Anonymous wrote:Echoing that parents need to understand the rules around Roth IRAs for their kids. A couple of important points that I'm not sure come across in the thread so far:

1) Kids have to have earned income. You can't just start a Roth IRA for them and fund it with gifted money if the kid hasn't earned income that year. That doesn't have to be a formal job with a paycheck -- it can be babysitting or lawnmowing money -- but it's a good idea to have the kid keep a record of money they've earned.

2) You can't exceed what the child has earned in a year. So "matching" only works if the kid is earning the full amount contributed but has kept some of it. So kid earns $1000, they can put $500 in and you can put $500 in, but they can't earn $250 and you put $500 in.

Here's a reader-friendly version of the rules, but always consult the IRS or an outside professional with any questions. You may think you're doing your kids a favor by bending or breaking these rules, but they're the ones who will have to deal with any messes you made by funding their Roth IRAs with contributions in excess of what they actually earned if they get flagged.

I haven't seen a single person on this thread saying their kid put in any money at all. It's the parents "matching" their earnings. On this page alone one person said they will contribute the max (and didn't specify if their kid actually earned that) and another poster who said they were matching 4:1.