Can My 17-12 months-Outdated Grandson Put money into a Roth IRA?

Pricey Penny,

My 17-year-old grandson is working after faculty and placing half of his wage in a financial savings account. His grandfather and I’ve pay as you go his school tuition, so he could have no huge bills there. 

I would really like for him to spend money on a Roth IRA. In doing so, he wouldn’t be tempted to withdraw the cash. He will probably be 18 in June if that could be a requirement. Is that this a wise factor to do?


Pricey J.,

In concept, it is a nice thought. The large benefit of a Roth IRA is that you just pay upfront taxes on the cash you spend money on trade for limitless tax-free development. Since your grandson is 17, I’m guessing he doesn’t have an enormous tax invoice. If he has the self-discipline to not contact that cash for 4 or 5 a long time, even a small quantity invested now might have an enormous payoff at retirement time.

However that half bears repeating: Your grandson must be prepared to not spend this cash for a number of a long time. That’s an enormous ask for a 17-year-old.

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Earlier than I’m going any additional, let me clarify the foundations: Anybody can fund a Roth IRA so long as they’ve earned earnings for the tax yr, i.e., cash earned from working. Age isn’t an element. The basic instance right here is that even the Gerber Child might open a Roth IRA.

Your grandson might contribute as much as $6,000 or the complete quantity of his earnings (whichever is much less) for 2022. In 2023, the restrict will increase to $6,500.

As a result of your grandson is a minor, he’d want a custodial Roth IRA. He’d personal the cash, however an grownup would wish to make the funding selections. As soon as he reaches the age of majority — between 18 and 21, relying on the state — he’d have full management over the cash.

Remember the fact that simply because the cash is invested in a Roth IRA doesn’t imply your grandson gained’t be tempted to spend it. He’d be capable to withdraw the contributions (however not the earnings) at any time. With the earnings, he’d pay a ten% early withdrawal penalty, plus earnings taxes on withdrawals earlier than age 59 ½. However taxes and penalties might not be an enormous deterrent when it looks like retirement is a lifetime away.

In the event you’re going to encourage your grandson to fund a Roth IRA, be sure to observe up with some steerage. An excellent place to start out is by speaking about short-, medium-, and long-term monetary targets.

Shopping for a automobile or saving up spending cash for faculty are examples of short-term targets. A medium-term purpose is likely to be to purchase a home after school or pay for graduate faculty. However the cash he invests in a Roth IRA is for a long-term purpose, which is his eventual retirement.

It’s attainable to make use of a Roth IRA for shorter-term targets, which is a often cited good thing about this account. For instance, you may withdraw as much as $10,000 value of earnings for a first-time dwelling buy with out owing taxes or penalties. You can too use the earnings for greater training and keep away from the standard 10% early withdrawal penalty, however not the taxes. That flexibility is sweet, however whenever you use the cash on shorter-term targets, you don’t lock within the true energy of the Roth IRA, which is limitless tax-free development.

Plus, you become profitable with a Roth IRA by investing within the inventory market. You sometimes don’t need cash invested in shares should you’ll want it within the subsequent few years as a result of the inventory market could be risky within the brief run.

An excellent purpose on your grandson could also be to proceed saving half of his paycheck and splitting it between his financial savings account and Roth IRA. Even when he solely invested $100 a month for the subsequent yr, the payoff might be substantial. Assuming 8% annual returns, that cash would develop to greater than $56,000 by the point he reaches his full retirement age of 67.

However simply as importantly, saving even only a small quantity for retirement is a good behavior to start out at 17. In case your grandson can get used to investing 10% to fifteen% of his paycheck whereas he’s nonetheless a youngster and proceed doing so all through his profession, he’ll be in nice form for retirement.

Finally, although, that is your grandson’s cash, so it’s his name. But when he’s already saving half his paycheck at 17, I feel you may belief him to make smart monetary selections.

Robin Hartill is an authorized monetary planner and a senior author at The Penny Hoarder. Ship your tough cash inquiries to [email protected].

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