Starting Young to Build an Impressive Nest Egg
When most people think about retirement savings, they generally visualize mature adults who are well into middle age and starting to looking forward to slowing down and enjoying their golden years.
But the truth is that it’s never too early to start saving for retirement, and teenagers and young adults who are aware of the many benefits of long-term savings and start saving early do themselves a great service. By including their own long-term future in their priorities instead of just focusing on the here and now, they give themselves the opportunity to save a significant amount over the years.
Roth IRA for Young People
For younger retirement savers, the best option is generally considered to be putting their money into a nondeductible Roth IRA. The Roth IRA has the benefit of tax-free accumulation. Additionally, it offers the advantage of eligibility when their income as a new wage earner is generally lower. Later in their savings career they are far more likely to need to use other savings vehicles that offer tax deductions.
Convincing a young person of the benefits of saving for retirement is often a challenge. Few teens or young adults are likely to think about retirement when they are just starting out, but family members can get them started by making contributions into a Roth IRA on their behalf.
Family Members Can Contribute
By establishing these accounts and making contributions to honor graduations, birthdays, and other achievements, the fund can quickly begin to grow. Parents, grandparents and others are able to make contributions equal to whatever earnings the child makes up to the maximum contribution limit, and this means that even a 17-year old whose summer job has yielded just $1,500 in earnings can have that amount of contribution deposited into their Roth IRA, where it will grow exponentially for their future needs.
This brings up a key point about a Roth IRA. In order to establish this type of account, the young adult must have earned income from employment rather than through investments. Whether their employment is a full time job or working part-time during the summer, they can contribute as much as they earn, up to a maximum of $5,500.
Contributions made into a teen or young adult’s Roth IRA by a parent or other interested party must keep in mind that once deposited, those assets are available to them and belong to them. They are able to take the funds out – in part or in full - whenever they want without having to ask anybody’s permission, and they will be subject to tax liabilities as a result of the early withdrawal.
Parents trying to convince their children of the value of starting to save early might want to share the following chart: It shows the value of a Roth IRA into which a $1,000 contribution is made each year between the time that they are 17 and the time that they are 26. The chart shows a variety of interest rates, but all outcomes make it clear that money that is saved early can grow significantly.
This should not only make an impression on the child, but also on any adult who is considering an appropriate gift for young person in their life. Those who are thinking about contributing to an IRA for another person should keep in mind that these gifts are not deductible contributions for the donor, and that they count towards the annual $14,000 gift exclusion.
For more information on making a gift contribution or establishing a Roth IRA, give us a call at (831) 462-0330.