September 21, 2023
Pricey Penny,

My 17-year-old grandson is working after faculty and placing half of his wage in a financial savings account. His grandfather and I’ve pay as you go his school tuition, so he can have no massive bills there. 

I would really like for him to spend money on a Roth IRA. In doing so, he wouldn’t be tempted to withdraw the cash. He shall be 18 in June if that could be a requirement. Is that this a wise factor to do?


Pricey J.,

In principle, this can be a nice concept. The large benefit of a Roth IRA is that you just pay upfront taxes on the cash you spend money on alternate for limitless tax-free progress. Since your grandson is 17, I’m guessing he doesn’t have a giant tax invoice. If he has the self-discipline to not contact that cash for 4 or 5 a long time, even a small quantity invested now may have an enormous payoff at retirement time.

However that half bears repeating: Your grandson must be keen to not spend this cash for a number of a long time. That’s a giant ask for a 17-year-old.

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Earlier than I’m going any additional, let me clarify the principles: Anybody can fund a Roth IRA so long as they’ve earned earnings for the tax yr, i.e., cash earned from working. Age isn’t an element. The basic instance right here is that even the Gerber Child may open a Roth IRA.

Your grandson may contribute as much as $6,000 or the complete quantity of his earnings (whichever is much less) for 2022. In 2023, the restrict will increase to $6,500.

As a result of your grandson is a minor, he’d want a custodial Roth IRA. He’d personal the cash, however an grownup would wish to make the funding choices. As soon as he reaches the age of majority — between 18 and 21, relying on the state — he’d have full management over the cash.

Take into account that simply because the cash is invested in a Roth IRA doesn’t imply your grandson received’t be tempted to spend it. He’d be capable of withdraw the contributions (however not the earnings) at any time. With the earnings, he’d pay a ten% early withdrawal penalty, plus earnings taxes on withdrawals earlier than age 59 ½. However taxes and penalties will not be an enormous deterrent when it appears like retirement is a lifetime away.

In case you’re going to encourage your grandson to fund a Roth IRA, be sure you observe up with some steering. A very good place to start out is by speaking about short-, medium-, and long-term monetary objectives.

Shopping for a automobile or saving up spending cash for faculty are examples of short-term objectives. A medium-term purpose is likely to be to purchase a home after school or pay for graduate faculty. However the cash he invests in a Roth IRA is for a long-term purpose, which is his eventual retirement.

It’s doable to make use of a Roth IRA for shorter-term objectives, which is a steadily cited advantage of this account. For instance, you’ll be able to withdraw as much as $10,000 value of earnings for a first-time house buy with out owing taxes or penalties. You too can use the earnings for increased training and keep away from the standard 10% early withdrawal penalty, however not the taxes. That flexibility is sweet, however while you use the cash on shorter-term objectives, you don’t lock within the true energy of the Roth IRA, which is limitless tax-free progress.

Plus, you generate income with a Roth IRA by investing within the inventory market. You usually don’t need cash invested in shares for those who’ll want it within the subsequent few years as a result of the inventory market might be unstable within the quick run.

A very good purpose on your grandson could also be to proceed saving half of his paycheck and splitting it between his financial savings account and Roth IRA. Even when he solely invested $100 a month for the following yr, the payoff could possibly be substantial. Assuming 8% annual returns, that cash would develop to greater than $56,000 by the point he reaches his full retirement age of 67.

However simply as importantly, saving even only a small quantity for retirement is a good behavior to start out at 17. In case your grandson can get used to investing 10% to fifteen% of his paycheck whereas he’s nonetheless a youngster and proceed doing so all through his profession, he’ll be in nice form for retirement.

Finally, although, that is your grandson’s cash, so it’s his name. But when he’s already saving half his paycheck at 17, I feel you’ll be able to belief him to make smart monetary choices.

Robin Hartill is an authorized monetary planner and a senior author at The Penny Hoarder. Ship your difficult cash inquiries to [email protected].