By Allison Loots, FPQPTM
Wealth Management Team, Austin Asset (www.austinasset.com)
Graduates will soon be showered with gift cards and cash, according to an annual survey on graduation gift spending from the National Retail Federation (NRF) and Prosper Insights & Analytics. Overall spending on graduation gifts in 2018 was $5.2 billion, and the average gift-giver spent $102.51. Before shelling out cash on the latest Apple accessory for your child, niece or nephew, consider a more lasting gift. Seed a child’s retirement by making a contribution to a Roth IRA.
Why give the gift of a retirement account? A $100,000 gift for just $1,000 down? Deposit $1,000 in a Roth IRA for a 15-year-old today and by age 75 they could have more than $100,000, assuming an 8 percent annualized return.
If a child has earned income, money received from someone else can be used to fund an IRA. It doesn’t matter if the child is a teenager with some part-time income or a graduate with a full-time job. The only stipulation is that your child must have earned income — not investment income — that was at least equal to the amount of the contribution. A W-2 from an employer would show proof of income. Alternatively, if the child earned income from non-W-2 sources (babysitting, shoveling snow, etc.), be sure to keep precise records of how much they made.
Worried about tying up funds that a child might need for future purchases, like a house down payment or furthering their education by attending graduate school? A Roth IRA offers the account holder a unique tool for accessing money in a pinch. You may withdraw your contributions (not earnings) from a Roth IRA at any time and any age without owing any income taxes on the money you take out. The reason: You have already paid taxes on the money you deposited. The earnings would continue to grow tax-free for retirement.
Once the child sees the account grow, he may elect to leave these funds set aside for retirement and find another way to make that down payment.
Applying for financial aid? Good news – the Free Financial Application for Student Aid (FAFSA) does not consider the value of a Roth IRA account as an asset the student or a parent is expected to spend to pay for education expenses.
It’s important to always be mindful of the current year’s IRS contribution limit as these may change from year to year. You have until April 18th to contribute to your Roth IRA for the previous year. The Roth IRA contribution limit for 2022 is $6,000. The IRS limits increased to $6,500 for 2023.
If this appeals to you, the next step would be to open a Roth IRA with a reputable, low-fee financial services firm. If your child is 18, they will be able to open their own account. If they have not yet turned 18, you will need to open an account for them.
