Retirement For Teen Kids?

Retirement For Teen Kids?

OCEAN CITY – At age 16, it’s hard to see past college (or even the
weekend), much less into retirement. But parents and grandparents tend to take
a longer view, and helping your teens set up and fund Roth IRAs could
potentially provide benefits in that far-distant time when their working days
are through.

The tax-deferred compounding and flexibility that make a Roth IRA a
powerful savings tool for adults can be even more compelling for someone 50
years from retirement, says Charles Toth, director of Product Management and
Personal Retirement for Bank of America Merrill Lynch. These
specialized accounts also create unique teaching opportunities that can help
your children get an early start on becoming savvy and sophisticated investors,
Toth says.

This could also be a good time to introduce your teens to the realities of
taxes (and tax deductions). Teenagers may initially be put off when you explain
that, unlike contributions to a traditional IRA, money going into a Roth can’t
get deducted from a person’s taxes. They’re likely to brighten, however, when
you point out that workers who earn less than $5,700 a year don’t have to pay
income taxes. A teen with a $10-an-hour job could funnel all of his or her
savings from the next few summers into a Roth IRA and, decades from now,
potentially withdraw a few hundred thousand dollars without ever having to pay
federal income taxes on any of it.

Of course, investments can also lose value and a Roth IRA can be an
effective vehicle for teaching teens other investment basics, such as the
importance of diversification, sound fundamentals and the trade-offs between
risk and return. Toth recommends sitting down with your kids to research and
select the investments together.

To establish a Roth IRA, teenagers will first have to file a W-2 or a W-4
and a tax return with the IRS to help prove they earned the income and
contributed it to the Roth. Parents and grandparents are, however, allowed to
match those earnings dollar for dollar, provided they’re kept outside an IRA.
Initially, the Roth will need to be set up as a custodial account. When your
child reaches the age of majority — 18 or 21, depending on your
state — he or she will then assume control of the money. By that
time, though, hopefully your young investors will have a solid appreciation of
the benefits of saving.

Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)