Custodial Roth IRA for Teenager?

[Aiming_4_55]

Is this starting too young, Custodial Roth IRA for 15 year old?

Well, my teenager started a job this summer and so far sticking with it part time while in high school. Since she is so young, we cover most of her needs except when she really want Starbucks or designer ripped jeans. She knows we consider them "treats", so she has to use her money for those most of the time. Sometimes a reward for doing well on a school project or test.

Her job is in the restaurant field, so it's very low hourly wage plus tips. Surprising, she is averaging about $20 an hour total. While we claim her as a dependent, we were looking at her filing a federal tax return reporting all hourly and tip income. With that, we are hoping to make a $4,000 - $6,000 Roth contribution for the year. She is aware, may not totally understand as she thinks she is saving for a car, but we will cross that decision in time.

We were thinking Vanguard Total Stock Market Index Fund (VTSAX) as an investment option with the mindset of set it and forget it, with periodic contributions.

Thoughts?

PS We reached our goal of 529 funding, so we feel there's enough for that.

 

[SevenUp]

If you can afford to do so, that is a very nice long term gift to her - your plan looks fine!

If she is a W-2 employee, she may not have a filing requirement, but it's probably good practice for her to file anyway.

 

[pjm-7]

15 years old is not too young to start long term, retirement savings. You may want to teach her the Rule of 72 of how money doubles. i.e.72 divided by 10(%) means that her money will double in 7.2 years, 72 divided by 12 means her money doubles in 6 years. Keep doubling that over time and it can turn into some real money. The fund just is good for a full market exposure.

As an incentive for her you may want to match her Roth contribution. If she puts $3000 into the Roth you will match the amount.

 

[Aiming_4_55]

PJM-7 - I started casual chat about long term savings and compound interest with her, but not the formal Rule of 72 title as it's too formal for her interest level at this time. God, I wish I had $1000 when I was 21, let alone at 15 of my own money. I spoke w/ DW about the annual contribution for both of our kids. It would be sweet to promote Roth contributions from age 15 to 22, 8 years at $6k for a balance of $48k, assuming no further contributions. Age 22 (48k), 29 (96k), 36 ($192k), 43 ($384k), 50 ($768k)...... At age 23 (assuming attends college), start profession and contribute to traditional IRA/401k to reduce taxable income during working years. Now, I'm sure there will be emergencies and laughter at such a crazy plan.

 

[NgineER]

Not too soon. Our four kids started earning money at ages 3-11. Contributing to Roth’s stated last year. I did get a letter asking how the four year old earned $72. She spent countless hours picking up toys and other garbage at a rental property we purchased. Realistically $10/ hour. The other kids earned $400 (8), and $1400 (11 and 13). We matched their contributions $:$. The older kids are in charge of the mowing and shoveling for some neighbors.

It would indeed be nice for them to be set with a sizable Roth at an early age.

If they get a W2 then they don’t need to file if they earn less than the standard deduction.

 

[RetireeRobert]

Is this starting too young, Custodial Roth IRA for 15 year old?

"NOT" too young, definitely not. The earlier you can get "the magic of compounding" started working for your kid, the better. You are a good parent to be getting your kid off to a good and early start with Roth IRA.

 

[RetiredHappy]

A dumb question... but how do you open a Roth on someone's behalf? I don't think it can be done unless you get cooperation from the kids. Then how do you manage the investments in their accounts?

 

[RetireeRobert]

A dumb question... but how do you open a Roth on someone's behalf? I don't think it can be done unless you get cooperation from the kids. Then how do you manage the investments in their accounts?

"Custodial" Roth IRA is how any parent would open one for their kids. Major providers make it easy: https://www.schwab.com/ira/custodial-ira

As to managing the investments inside the Roth IRA, that could become an opportunity for learning and education "with" the kid. Or the custodian could do it on their own.

 

[RetiredHappy]

"Custodial" Roth IRA is how any parent would open one for their kids. Major providers make it easy: https://www.schwab.com/ira/custodial-ira

As to managing the investments inside the Roth IRA, that could become an opportunity for learning and education "with" the kid. Or the custodian could do it on their own.

Thanks. It won't work for a child who is over 21 yo.

 

[RetireeRobert]

Thanks. It won't work for a child who is over 21 yo.

Like my 30 year old "adult" youngest child. I have to nag and plead and cajole to try to get her to do anything with her IRA! Every year it is like pulling teeth.

 

[RetiredHappy]

Like my 30 year old "adult" youngest child. I have to nag and plead and cajole to try to get her to do anything with her IRA! Every year it is like pulling teeth.

Pretty much in the same boat here. Last week I was thrilled to learn that IRA account which my son had from 5 years before was sitting there with $51K in it. He did not do a rollover when he left his job. When I walked him through setting up a Fidelity account to transfer his account over from our existing wealth management firm, he declared that he could see his IRA money sitting there. He had not looked at it in more than 5 years. Talk about passive investing. I have been gifting his taxable brokerage account each year so that he has savings.

 

[The Cosmic Avenger]

Yes, we did this the first year our kid worked more than a handful of scattered hours, matched their net pay as a gift into a custodial Roth IRA that I opened for them. (Well, technically I suppose as far as the IRS is concerned, they deposited all their net pay, and we gifted them the same amount for spending money....) Our kid seems to get compounding, although I don't know if they have internalized it the way we have after having accounts grow over decades. I also think matching is an added incentive to make money for themselves, like a matching contribution is to 401(k) contributions.

I think having a head start on savings will help, but also just having the IRA account to which they can contribute, too, will be one less barrier for them as young adults new to the working world.

 

[armor99]

Is this starting too young, Custodial Roth IRA for 15 year old?



Well, my teenager started a job this summer and so far sticking with it part time while in high school. Since she is so young, we cover most of her needs except when she really want Starbucks or designer ripped jeans. She knows we consider them "treats", so she has to use her money for those most of the time. Sometimes a reward for doing well on a school project or test.



Her job is in the restaurant field, so it's very low hourly wage plus tips. Surprising, she is averaging about $20 an hour total. While we claim her as a dependent, we were looking at her filing a federal tax return reporting all hourly and tip income. With that, we are hoping to make a $4,000 - $6,000 Roth contribution for the year. She is aware, may not totally understand as she thinks she is saving for a car, but we will cross that decision in time.



We were thinking Vanguard Total Stock Market Index Fund (VTSAX) as an investment option with the mindset of set it and forget it, with periodic contributions.



Thoughts?



PS We reached our goal of 529 funding, so we feel there's enough for that.

Sounds like a great idea… time is such a blessing in this case. Decades to grow!!! Just remember that I do not believe you can contribute more to a ROTH Ira, than is made in a single year. So for example if total income for the year was $1000, you cannot contribute $5000 to the ROTH Ira that year..

 

[rodi]

I told both my sons that when they started w2 income - if they put in $500 I'd match $500 in Roth IRAs. Younger son did that at age 17, older son was 19. Younger son changed jobs to one that paid significantly more, but was under the table... No match from me. It paid well enough that he paid for his month in Europe in August and he socked a bunch in a brokerage account and a portion of it will be used for spending at college this year. His Roth is still growing even though he hasn't contributed in a year. (He's age 18 and we are driving him to college tomorrow.)

Older son (age 20) is still working a W2 job and continues to invest in his Roth - although I had to lecture him to save/invest outside the W2 to build an emergency fund.

 

[RE2Boys]

I started Roth IRAs for my sons when they were 15 years old, when they got their first W2s. I started them at Vanguard. My deal with them was I matched dollar for dollar. Of course their total contributions were limited by their earned income. The boys were very concerned about tying up their funds for an extended number of years and I assured them that their contributions can be withdrawn penalty free if needed. Never became an issue.

Biggest issue was when they turned 18, was to get my name off the account as the custodian.

 

[The Cosmic Avenger]

Biggest issue was when they turned 18, was to get my name off the account as the custodian.

Hm, I haven't done that yet...does it matter? I might start the process soon, but then if I still have access to it, we could still contribute "matching funds" to it if we are able.

 

[SecondCor521]

Hm, I haven't done that yet...does it matter? I might start the process soon, but then if I still have access to it, we could still contribute "matching funds" to it if we are able.

Schwab forced me off as custodian when my son turned 21. I think it may be part of the UTMA law. They basically locked my access to the account on his 21st birthday, and sent a letter a bit beforehand telling him he needed to set up his own account login and so forth.

So now when I log in I only see his younger sibling's Roth IRA. I'm sure we'll go through the same process when they turn 21 next year.

As far as contributions go, as custodian I'd just have them send me whatever money they wanted to invest (usually via Paypal), then I'd invest it plus whatever matching deal I had going at the time. I'd then have them sit with me to see the transaction getting done so they'd have familiarity with the brokerage website and how transactions are done and so forth.

Now that the situation is reversed and my 21 year old can make contributions and I can't, I'd probably just send any matching funds to the kid (probably via PayPal) and follow through with them to make sure the money got into their Roth and then got invested. Mostly just trying to develop good habits and knowledge.

 

[RetireeRobert]

Schwab forced me off as custodian when my son turned 21. I think it may be part of the UTMA law. They basically locked my access to the account on his 21st birthday, and sent a letter a bit beforehand telling him he needed to set up his own account login and so forth.

/QUOTE]

I had all three of my kids set up with UTMA accounts at Schwab. Yes, I do recall getting "kicked off" and locked out of the accounts by Schwab when the age of majority arrived.

 

[Aiming_4_55]

Thanks for all the feedback so far.

From a documentation standard point, what do I need? Both are teenagers, 15 or under.

Daughter - w2 hourly pay plus tips, in total should be over $6k per year.

Son - no w2, but receives pay for misc. tasks like mowing lawn, shoveling snow, walking dogs, cleaning, etc. Might be over $6k, but I can pay him weekly to take out trash, wash cars, etc. to max the annual Roth contribution.

For my son, should we keep a spreadsheet listing the date and activity? I don't want to track neighbor's names for payment of mowing lawn, etc. Is that necessary?

 

[RetiredHappy]

Thanks for all the feedback so far.

From a documentation standard point, what do I need? Both are teenagers, 15 or under.

Daughter - w2 hourly pay plus tips, in total should be over $6k per year.

Son - no w2, but receives pay for misc. tasks like mowing lawn, shoveling snow, walking dogs, cleaning, etc. Might be over $6k, but I can pay him weekly to take out trash, wash cars, etc. to max the annual Roth contribution.

For my son, should we keep a spreadsheet listing the date and activity? I don't want to track neighbor's names for payment of mowing lawn, etc. Is that necessary?

I don't think your son will qualify for Roth. He needs to have a 1099 or W2 to show proof of income.

 

[JT90505]

We opened Roth IRAs for the kids with Vanguard when they got their first jobs. Target retirement 20xx. I don't remember it being any problem whatsoever, even at Vanguard with their legendary customer service. (We did not need to show proof of income to Vanguard, the custodian really doesn't care...IRS will probably notice when taxes are filed..or not filed)

The son would qualify if you file a 1099, he is an independent contractor. (not tax advice, do due diligence)

Even though they are both young adults now we are still on the accounts. Is there any reason to go through the hassle of taking our names off?

 

[The Cosmic Avenger]

Here's some IRS guidance on summer employment that would probably apply to most students' part-time employment: https://www.irs.gov/newsroom/its-su...-can-help-make-livin-easy-for-teens-with-jobs

Sounds like if you want to contribute to a Roth IRA, they'll have to report their income as self-employment income, and pay the income tax on it.

 

[armor99]

I don't think your son will qualify for Roth. He needs to have a 1099 or W2 to show proof of income.

I believe that is correct. They do not care where the money comes from to fund a ROTH. Could be you, your son, or me for that matter. But you have to prove (via w2) that your son had income, of which you can match up to thst amount per year (up to the ROTH limits).

 

[RetireeRobert]

For my son, should we keep a spreadsheet listing the date and activity? I don't want to track neighbor's names for payment of mowing lawn, etc. Is that necessary?

Yes, a simple log of date, job performed, amount earned. Customer last name at each job would be nice too, but, at least the dates/chore/amounts.

 

[RetireeRobert]

I believe that is correct. They do not care where the money comes from to fund a ROTH. Could be you, your son, or me for that matter. But you have to prove (via w2) that your son had income, of which you can match up to thst amount per year (up to the ROTH limits).

I do not think 1099 absolutely necessary.

Many self employeds do gigs all the time but not in amounts for any one employer that triggers need for 1099 from that employer.

The key is the self-employed person needs to keep a contemporaneous log showing: date, amount earned, nature of gig (what did they do), and helpfully customer name/location. Then add it all up and report as self-employment income on schedule C with tax return. Gig income is "supposed" to be reported on tax return whether supported by a 1099 "or not". And as just stated, gig people do not always get 1099's.

15 year old kid can do this tax return filing, and due to overall low amounts of years total earnings owe no income tax. But file the tax return to justify making the ROTH IRA contribution for that year.