How Your Kid’s Summer Job can Jumpstart Retirement Savings

Carla Fried

 

Okay, I know it sounds absolutely crazy to suggest a teenager or college student should be thinking of retirement. But if your child has a summer job that pays—or a job any time of year that he gets paid for-one of the best parental assists and lessons you can deliver is to get your child to open a Roth IRA account.

 

Here's how a short summer job could turn into a tax-free $50,000:

• Parents can help kids fund an IRA. To be eligible to open an IRA your child must have earned income. That's the summer job. But here’s the neat part for parents, grandparents, aunts, uncles (you get the idea): The child's IRA contribution doesn’t have to come out of his or her earnings. Anyone can provide the actual money that goes into the IRA. The only stipulation is that the child actually earned an equal (or greater) amount during that tax year. So let’s say your daughter makes $2,000 this summer. She is eligible to contribute $2,000 in the IRA, but you could be the one to give her $2,000 of your own money to fund the IRA.

• Introduce the Matching Contribution Concept. Let’s face it, suggesting a 15 year old, or 20 year set aside summer earnings for some goal 50 or 60 years off is not going to go over too well. But at the same time, maybe you don’t have to finance 100 percent of the IRA either. How about offering a generous matching contribution deal: For every $10 your child contributes you will contribute $50 or $100. Just remember the child must have earnings equal to the total amount contributed.

• Show the Carrot. You’ll want to provide incentive to do this. I’d pull up a simple future-value calculator and show what the investment today can grow to in the future. For example, a $2,000 investment that grows at an annualized 6 percent –that seems like a rational rate of return for a long-term goal—will be worth close to $50,000 in 55 years. And that's just for one year's contribution. Do this for a few years while your kid is in high school and college and you’ve given them an absolutely huge assist on their future security.

• Choose the Roth IRA. There’s absolutely no reason to choose the traditional IRA. It's not as if the upfront tax deduction on a traditional IRA contribution will be of any value to a child with limited income. The prospect of 100 percent tax-free withdrawals in retirement from a Roth IRA is the better deal. Besides, the money contributed to a Roth can always be withdrawn for any reason without any tax or penalty. It's just the earnings on those contributions that must stay invested until age 59 ½ to qualify for tax-free withdrawals. Of course, you don’t want your child to withdraw the money for a spring break jaunt to Cabo. But explain that they can in fact access their contributions and discuss what constitutes a true emergency.

• Don't Worry about the Impact on College Financial Aid. Money a parent or child has invested in a qualified retirement account is not part of the calculation used to determine a family's financial aid eligibility.