Photo: Flickr via familymwr
My parents have done a lot for me. But one of the things I am the most grateful for is that they opened up a Roth IRA for me when I was in high school, the first year that the account was available.Like many people, I didn’t think much about long-term savings when I was younger. Most of my goals were relatively immediate, saving for things like a video camera, travel, or the security deposit for my first apartment. And I remained similarly short-sighted at my first couple of jobs post-college.
Convinced I wouldn’t be at my first job long enough for them to start matching my contributions, I passed on contributing to my 401(k). I felt extra sour about that particular company’s retirement plan when I discovered that my holiday bonus — a deposit into my 401(k) — disappeared when I quit because I hadn’t vested. So what did I do? I said “screw it” to retirement savings, and ignored the 403(b) at my next job, too.
Flash forward to now — after several years of freelancing and learning about finances, I wish that I had the foresight to set up a 401(k) when I could have. But that also makes me extra thankful for the retirement account I do have, and have had since my teens — my Roth IRA. (See also: Why Roth IRAs Are Ideal for Young Professionals)
Some Roth IRA Benefits
Anyone who has earned income can set up a Roth IRA, and the accounts are generally very easy to open.
Roth IRA account holders can withdraw any funds they contributed to their account, tax-free, at any time. While I don’t think it’s good practice to encourage people to tap into their retirement savings early, this can be helpful. For example, I once removed a couple thousand dollars from my Roth IRA so that I could buy an inexpensive used car without resorting to a loan.
Even some Roth IRA earnings can be withdrawn before retirement time under certain circumstances, such as when you’re buying your first home.
Setting Up Roth IRAs for Kids
As I mentioned above, who has earned income can set up a Roth IRA. You can’t pay your kid to do work, but if he has a summer or part-time job, he’s eligible. Even cash jobs like babysitting can count. According to Janet Bodnar at Kiplinger’s, if your child mows lawns for the summer, you just need to “keep careful records of each job…And it would make a stronger case if he mowed lawns not just for you but for other customers as well.”
If your child has spent part (or, well, all) of her money, you can also kick in cash on her behalf — but the maximum contribution is $5,000 or the total of your child’s earned income, whichever is smaller.
Bodnar also notes in her piece that some companies will not open accounts for children under 18. Others, do, however; just know you might have to search around a little bit to find one.
Did you set up a Roth IRA for your child? If so, what was your experience?