As stewards of the next generation’s financial well-being, introducing your teen to the benefits of a Roth IRA is a priceless gift. Today, we’ll unravel the mysteries of how Roth IRAs can benefit your teen, demonstrating how this financial tool can set your teen on a path to wealth. After all, what better legacy to pass on than the gift of financial empowerment?

Teenagers with part-time or seasonal jobs earn some spending money while gaining valuable work experience. They also have the chance to contribute to a Roth IRA — a tax-advantaged account that can be used to save for retirement or other financial goals.
Minors can contribute to a Roth IRA provided they have earned income and a parent (or guardian) opens a custodial account in the teen’s name. The contributions your teen makes to a Roth IRA from their paychecks are made on an after-tax basis, which means they can be withdrawn at any time, for any reason, free of taxes and penalties.

Caution your teen that although those earnings grow tax-free, any nonqualified withdrawals of earnings are generally taxed as ordinary income and may incur a 10% early-withdrawal penalty, unless an exception applies.

Qualified withdrawls

A withdrawal of earnings is considered qualified if the account is held for at least five years and the distribution is made after age 59½. However, there are two penalty exceptions that may be of special interest to your teen saver. Penalty-free early withdrawals can be used to pay for qualified higher-education expenses or to purchase their first home, up to a $10,000 lifetime limit. (Ordinary income taxes will apply.)

Flexible College Fund

A Roth IRA may have some advantages over savings accounts and dedicated college savings plans. Colleges determine need-based financial aid based on the “expected family contribution” (EFC) calculated in the Free Application for Federal Student Aid (FAFSA).
Most assets belonging to parents and the student count toward the EFC. But know this, retirement accounts, including a Roth IRA, do not. Thus, savings in a Roth IRA should not affect the amount of aid your student receives.

While the balances in those accounts don’t count, the actual withdrawals from a Roth IRA and other retirement plans do count toward income for financial aid purposes.

Financial Head Start

Opening a Roth IRA for a child offers the opportunity to teach fundamental financial concepts, such as different types of investments, the importance of saving for the future, and the power of compounding over time. You might encourage your children to set aside a certain percentage of their paychecks, or offer to match their contributions, as an incentive.

In 2023, the Roth IRA contribution limit for those under age 50 is the lesser of $6,500 or 100% of earned income. In other words, if a teenager earns $1,500 this year, his or her annual contribution limit would be $1,500. Parents and other individuals may also contribute directly to a teen’s Roth IRA, subject to the same limits.

In the Word

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’

Luke 14:28-30

These verses are often interpreted as a lesson in careful planning and counting the cost before embarking on a big project. The passage underscores the importance of assessing the resources and commitment required for a project to avoid starting something and then not being able to finish it.

In essence, Luke teaches us to be intentional and thoughtful in our commitment to Christ. He encourages us to recognize the significance of our decision to follow Him and to be prepared for the challenges and sacrifices that may come our way. By doing so, we can live out our faith with diligence and, with God’s help, finish the race as faithful disciples of Jesus Christ.


Sources: Broadridge Investment Management Solutions

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