Did you know that children can begin contributing to a Roth IRA once they start earning income? In this short Finance Moment podcast episode, Associate Financial Planner Lance Knaack shares the benefits of contributing to a retirement account as young as possible.
Do you have a kid that earns money in your household? Do they babysit, mow lawns, shovel snow in the neighborhood, or any other of countless ways to make money? Mine just turned 13 this summer and became a certified soccer referee.
Of course his first thought after starting to make money was how can I save for retirement? Ok, maybe not, but that’s what parents are for.
A great option for kids to save for retirement from an early age is the Roth IRA. Money put into a Roth IRA is after-tax, meaning they have already paid taxes on the money. Money might be able to grow 40 or even 50 years tax-free depending on when they decide to retire. $1,000 invested at age 14 with a 7% annualized return would be worth roughly $44,200 at age 70.
Kids using this strategy really shouldn’t have to worry too much about taxes if they are staying under the contribution limit of $7,000 in 2024, but it is always a good idea to check with your accountant and make sure they agree.
Additionally, if you or your child are ever audited it is a good idea to have record of the work they did. Keep an excel sheet, or notebook showing the work they have done, dates, and amount earned. Anything you save may be helpful to prove to the IRS that the child actually earned income. Personally, I’m teaching my son how to do this on excel and use some of the different formatting and simple formulas excel provides that he can hopefully use later in life. Additionally, it adds some responsibility to his work and makes it seem a little more like a business.
In summary, help your kids start saving early in life to help them get in good financial habits and get a little closer to retirement. And please be nice to those referees the next time you are at a kids sports game. If you have questions, please reach out to your financial planner or associate financial planner. Visit Syverson Strege online at only work for you dot com or call us at 515-225-6000.