Parents and Grandparents: Reward Your Teen’s Hard Work

When your child or grandchild imagines how they’ll spend the paycheck from their first job, investing might not top the list. Yet, setting aside money early to buy a house, pay for education or even retirement later can be beneficial as it allows for more time for that investment to grow.

Reward your teen’s hard work and get them invested early by opening a Custodial Individual Retirement Account (IRA) on their behalf.

A Custodial IRA can either be a Traditional IRA or a Roth IRA and can be opened for children who have earned income. The biggest difference between a Traditional and Roth IRA is how taxes are applied. Contributions to Traditional IRAs are tax-deductible but withdrawals in retirement will be taxed. Roth IRAs are not tax-deductible but withdrawals in retirement are tax-free.

With assets managed by the custodian until the child reaches age 18 or 21, depending on your state, you can:

Help your child benefit from compounding: Compounding rewards your child for not only the actual dollars you invest but also on what those dollars earn. If a Custodial Roth IRA is left in an account until retirement, they could have 50 years or longer of tax-free investment growth.

Reward hard work: Consider matching your child’s or grandchild’s earned income dollar-for-dollar through a Custodial Roth IRA. For example, if they’ve earned $2,000 flipping burgers, you can put $2,000 into an IRA for them. Even a modest contribution can become a sizable investment over time. (The maximum annual contribution for 2023 is $6,500.)

Build savings for important expenses: The funds in a Custodial Roth IRA can be withdrawn penalty-free to cover higher education expenses or finance a first-time home purchase. The invested funds can also be used toward their retirement savings.

Best of all, there are no age restrictions. As long as your child or grandchild has earned income, a parent or grandparent can contribute to their IRA.

While investing for a house, education, or retirement may not be on your child’s mind, establishing a Custodial IRA can help get them started down the path of financial stability.

Give your income-earning teen a head start on their financial future. Call your Jemma Financial Advisor to discuss if a Custodial Roth IRA is right for a child or grandchild in your life.