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Teaching Kids about Money: Teach Your Young Adult about Investing with a Roth IRA

Opening a Roth IRA is a great way to introduce your child to investing. Once your child begins working, you can gift them an amount up to their earned income or the annual maximum IRA donation limit (whichever is less), help them open a Roth IRA and show them how to contribute, invest and monitor the account. We can help with this! Here is a sample letter to introduce the idea to your young adult:

For your birthday, we’re going to help you open and fund a Roth IRA

This is a type of Individual Retirement Account (IRA), where you contribute money that you’ve paid taxes on, let it grow over time, and when you are ready to use it, distributions are tax-free. The intent is to provide for your retirement, so to be "qualified" for tax-free distributions, you need to be at least age 59½. But there are lots of exceptions, see below.

Why would you do this now? 59½ is a long way off…

True. There are a couple of reasons for starting now.

Because you can! IRA contributions can only be made if you have earned income. The limit is $6k per year or however much you earned, whichever is less. It’s exciting that you have a job and are earning money, and this is one of the perks.

Because of the power of compound interest over time. If you put $2,000 in this account, and never put in another penny, invest it reasonably and withdraw it at 59½, it will be worth around $15,000. If you do continue to contribute when you can, it will grow more. The point is that time is on your side. Starting early is a very smart thing.

It’s not too early to learn about investing. Let’s talk about the investment choices available to you. When you’re ready, you’ll decide how to invest this account.

Why a Roth IRA?

Because your money grows and comes back to you tax-free, which is great. You may not always be able to contribute, because there are income limits, but if you contribute when you can, and be patient, you get tax-free growth. Also the Roth IRA is pretty flexible in some ways. You can avoid the 10% penalty on early withdrawals before 59½ for certain reasons:

• Disability
• Buying your first home ($10k withdrawal allowed, helps with down payment)
• You have unreimbursed medical expenses exceeding 10% of your Adjusted Gross Income.You are paying medical insurance premiums after losing your job.
• The distributions are used for qualified higher education expenses (for yourself, kids or grandkids).

You can also take out your contributions anytime (but not earnings) without tax or penalties.

So I have to put all my wages into this account?

No, you can contribute funds from any source, up to the amount of your earnings. We will make you a gift of the funds for your first deposit.