Image: Priscilla Du Preez on Unsplash
We’ve written before about why you should encourage your kid to open a Roth IRA—they can start building up savings from a young age, benefitting from compounding and learning about saving and investing along the way.
To sweeten the deal, though, consider adding an “employer match” to your child’s contribution: Match them dollar-for-dollar, or whatever you decide, to incentivize more savings.
For a child to open/contribute to a Roth, they must have earned income. But you can gift money to a Roth separately from that.
“The contribution you make to your kid’s Roth IRA can be a gift from you or someone else,” reports RothIRA.com. “Remember to consider the IRS’s gift tax rules. The contributions you make to a Roth IRA for your kid will count against the limit on tax-free gifts you can make to one person, which is $15,000 for 2018 and 2019.” If you gift under that amount, there won’t be any tax paperwork to deal with for either of you. The IRS’s gift guidelines are here (and the IRA contribution limit for 2019 is $6,000).
Alternatively, you could subsidize their contributions (from, say, babysitting, housework or another after-school job) completely.
Roths are perfect for kids because of the long time horizon the investments will have to grow, plus the fact that the earnings will grow tax-free. Consumer Reports breaks it down:
Let’s say you give $500 annually over five years that is invested in a Roth IRA and the account grows at a conservative 4 percent annual rate of return. That $2,500 investment would grow to more than $16,000 in 45 years. If the account grows at an annualized 6 percent, it would be worth almost $40,000.
As CR also notes, the “matching” contributions shouldn’t come for free. You’ll want to talk to your child about the importance of saving and investing, and explain why they shouldn’t just cash out their account when they think they need to. Those will be the truly valuable lessons.