Happy Belated Father’s Day (A Custodial ROTH IRA?)
My family and I were on vacation last week at Bethany Beach, and as usual, it was a great and relaxing time. It was especially nice to see my kids and their cousins playing together after last year’s hiatus. I didn’t totally escape work and did have my laptop in tow (I avoided it as much as possible!). While my oldest is still just 11 (12 in September), I did start thinking it was about time to get him working a summer job in some capacity.
In Virginia, a child as young as 14 can apply for a work permit and start earning “real” income (vs. side cash jobs that younger kids might engage in). If you have a working minor in your household, assisting him or her with setting up a Custodial ROTH may provide a wonderful head start toward saving for retirement. It’s hard to think about a 14-year-old saving for something that may be 50+ years away, but as with any investing, the longer the better (aka the power of compounding returns).
A minor under the age of 18 cannot set up a ROTH IRA on his own, so a custodian (parent, grandparent, or other non-minor) is required to help with set-up and management. Once the minor turns 18 or 21 (depending on your state), the ROTH IRA becomes his or hers to manage. Just like the rest of us, minors have a limit on contributions of $6,000 per year or the minor’s total income for the year, whichever is less. So, if a child earns $2,000 working a summer job, the maximum contribution would be $2,000.
My own father actually “strongly recommended” I set up a ROTH IRA when I got my first job. Frankly, it was pretty good foresight on his part, because ROTH IRAs were not as popular as the are now. At the time, I was not a fan! Why would I contribute to a retirement account at my age??? (see above for why!). Your own kid or grandkid might have a similar reaction, but it can be a very helpful tool in teaching a child to save for themselves on a regular basis (the old pay yourself first rule).
As a reminder, ROTH IRAs have many benefits; tax-free growth, no tax when withdrawn (after age 59.5) no required withdrawals at age 72, and there are some one-time exceptions, like up to $10,000 for a first-time home purchase (and the 5—year rule has been satisfied).
So, kudos to my own dad for encouraging my brother and I to open a ROTH IRA at such a young age. Here’s hoping you’ll try to do the same for your kids.
Happy Belated Father’s Day!
Nathan