Dear Liz: Our 16-year-old daughter has been frugal since she started understanding money at about age 6. He works and earns a decent salary for a high school student. Her savings are pretty big now. She wants to open a Roth IRA while she is young and has no income tax liability. My wife and I have pensions and substantial savings, but only one to the IRA. So we have no idea how to help her open Roth. What to do? He has enough money to maximize contributions each year through high school and college and wants to take full advantage of 50 years of tax-free growth.
Answer: Contribution to the Roth IRA is a great way for young people to create wealth, and the sooner they can start, the better.
Traditional IRAs usually offer a tax deduction for contributions, but withdrawals are taxable. In contrast, Roth IRAs do not offer advance tax reductions, but withdrawals are non-taxable in retirement. Roth’s decision for a traditional IRA makes sense when you expect your tax rate to be the same or higher in retirement.
The $ 6,000 contribution at age 26 can rise to about $ 105,000 by retirement age, assuming 7% of the average annual return. (It is a reasonable average for decades of investment in a diverse stock portfolio.)
Make the same contribution at age 16, and the money could grow to over $ 210,000 by age 67. An additional 10 years of compound gains actually doubles the total.
To contribute to IRAs or Roth IRAs, people must have earnings such as salaries, wages, or income from self-employment.
They are allowed to give 100% of their earnings during the tax year or $ 6,000, whichever is less. (People aged 50 and over can give an extra $ 1,000 in compensation.) If your daughter, for example, earned $ 4,000 this year, that’s the maximum she could contribute to Roth for 2021.
Your daughter usually can’t open her own account until she’s 18, so you’ll need to find a brokerage house that offers custody Roth IRAs. She would be the owner of the account, and you would be the guardian until she turns 18 years old. Fidelity, Schwab and Vanguard are among the discount brokerages that offer custody Roth IRAs without the need for minimal investment or charging for maintenance fees.
Liz Weston, a certified financial planner, is a columnist for personal finance NerdWallet. Questions can be sent to her at 3940 Laurel Canyon, no. 238, Studio City, CA 91604, or using the “Contact” form at asklizweston.com.
