Practical Finance for your Children

Dear Client,

A few years ago, we made a card game called Conscious Wealth Conversations that allows families to talk about money in meaningful ways. One of my favorite money questions I like to ask someone is: What was your first job? Our first job is a big part of our Money Memories and contributes to how we think about money. For many, it is selling girl scout cookies. For me, it was washing dishes at my father’s restaurant. Whatever it was, I am almost certain it left an imprint on you.

In this monthly letter, I want to focus on ways that you can practically support the children, grandchildren, or even nieces and nephews in your life to become financially-savvy and prosperous.

Raising financially-savvy kids is easier said than done. But when it comes to retirement planning, parents, or other family members can give children a head start by establishing a Roth IRA for Kids account.

With a Roth IRA for Kids, your child can benefit from all the same advantages offered by a regular Roth IRA – just tailored to minors. An adult serves as custodian and manages account decisions until they reach a certain age, usually18 or 21 depending on the state, and when it's time the assets are then transferred into an account in the child's own name so they become responsible over its management.

If a young person has earned money, they can add it to a Roth IRA for Kids. This includes money from jobs like babysitting or mowing lawns. The most they can add is $6,000 or all the money earned that year - whichever is less. For example, if your child earned $2,000 in one year then they could put up to$2,000 into their Roth IRA custodial account. Make sure to help your child keep a written record of their earnings in case the IRS asks and to encourage healthy money habits.

There are other contribution options to keep in mind. An adult can make contributions to the Roth IRA for Kids account as a gift for working, or the child can choose how much of their earnings they want to put in and an adult can match it(remember that this total cannot be more than the amount they earned this year or $6,000).  

Note: Contributions to Roth IRAs are made with money that has already been taxed, so you cannot claim them on taxes. Most kids have low earnings and their income tax rate is usually zero or low, which means tax deductions may not be important right now.

Teaching children about saving money is important. It might be hard to get a child to put their money into a Roth IRA, even if they qualify. Realistically, younger kids are likely going to want to spend their money on fun rather than investing for the future, and older teens have immediate needs like cars or college tuition bills. Show your kids how even small contributions over many years can add up quickly. Showing them how they can be a multi-millionaire at 70 because of smart saving can be very appealing even to kids.

If something does come up, the account owner can take out money before retirement if they need to. In fact, they can take out up to 100% of what they put in without any taxes or penalties. Withdrawals are taken from contributions first; any money that comes from earnings, might be taxed unless certain conditions are met.

When your grown child needs to use the money from their Roth IRA at retirement age(59 1/2 or older), they won't need to pay taxes or a penalty on it if they have had the Roth IRA open for at least five years first. If they take money out before then, they will need to pay taxes and a 10% penalty. There is an exception: if they are using the money for a first home and the five-year rule has been met, up to $10,000 can be taken out without having to pay taxes and the 10% penalty.

You can help the kids in your life save money by setting up a Roth IRA. The money will grow tax-free and though it might not seem important to them now, they will certainly be happy with it later!

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Sincerely,

Brandon Hatton on behalf of HATTON INVESTMENTS

President, Chief Investment Officer

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