Financial Planning for Generation X & Y Women
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Expert Q&A Archive

Parents helping teens establish Roth IRAs
What do you think about parents helping teen-agers (who have earned income) to establish Roth IRAs?
Jennifer Lane:
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I think it's a great idea. It's an opportunity to teach teens about
investing and a great way to start building a nest egg.
Alyssa Rakovich:
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I think it is always valuable to teach a teenager the importance of saving - helping a teenager open a Roth IRA and contribute a portion of their earned income is a wonderful way to teach them about money and saving and investing in their future. You can help them pick out mutual funds and look at the top holdings. They might be Starbucks or Wal-Mart or Coca Cola. This way they can see by investing in mutual funds they have ownership in those companies whose products and services they use.
Jeannine Falter:
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In general, I'm all for parents teaching their children the value of saving & compounding interest as early in life as makes sense; however, I wouldn't provide specific advice without knowing more details about the family's (childís and parentís) financial situation.
Ellen Hoffman:
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This is a great idea. Use establishment of the Roth as an opportunity to educate your child. Have him/her participate every step of the way, in deciding where to put the account, how to invest it, etc. If done properly, helping your child start a Roth IRA can accomplish the

  1. Awareness of the need to start saving for retirement early/developing the savings habit;

  2. Long-term compounding;

  3. Education on how to invest;

  4. Even education on taxes, if you explain exactly how a Roth works and give some examples with numbers.

Also this is a time, when the child probably does not have a lot of income and therefore will pay little or no taxes on the amount saved in the Roth.
Rosemary Ervin, CPA:
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Anytime a taxpayer has the opportunity to get into a ROTH, it is a good idea. There are a few caveats:

  • The money is locked up until age 59 1/2 (with a few exceptions).

  • There is no immediate deduction for contributing to the ROTH.

  • It is with after-tax dollars. So the teenager has earned income, either self-employment or W-2 income that he/she pays income tax on (usually at a low tax bracket rate).

Dorothea Bernique:
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It's never too early to start, although you may want to consider a type of savings that is more accessible and not as long term. I say this just in case there is a need that arises. You may want to create a small emergency fund also.
Michael A. Masiello:
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This is perhaps one of the best things that can be done for children. Excellent idea and the never taxed compounding impact over 40-50 years can be huge. Remind the child that this shouldn't be touched prior to age 59 1/2. Great idea and should be done where available.
E. Kim Dignum, CFP:
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This is a wonderful way to begin children on their investing paths. The parents can make a gift of the contribution, the parentsí planner can teach the children about where to invest, how to follow the investment, about time value of money, etc. The final result of course is the tax-free path they
are setting for their children.
Bettye J. Banks:
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Of course consult your tax adviser or investment professional. I think it is a phenomenally great idea! After tax investment started early means a healthy realized gain over time. These parents have exactly the right mind set. Money has a time value and the earlier you start the greater the benefit! I say Go for it!