April 21, 2016
If you have a child or grandchild who is going to get paid for work this summer, I want you to consider a way to gift them a valuable retirement stake.
Anyone with earned income can open a Roth IRA. And yes, a summer job counts. I am not suggesting that your child or grandchild funnel any earnings from this year’s job into a Roth. It’s a bit of a stretch to ask them to focus on retirement, when their career hasn’t even started! (I do hope you expect them to save for a more immediate financial goal, such as helping with college costs.)
What you can do is offer to match all, or a part of their earnings, with the understanding that your match will be used by your child/grandchild to contribute to a Roth IRA. This is totally legit as long as they can show earnings that are at least equal to the amount of money they contribute to the Roth IRA. And as long as you gift no more than $14,000 a year to any individual, they will owe no tax on the money.
If an 18-year-old invests $1,000 in a Roth IRA and leaves it untouched for 50 years, it will be worth more than $18,000 assuming a 6 percent rate of return. Let’s say you do this for five years, and to keep things simple let’s just assume your child/grandchild earns $1,000 each of those five summers. Even if they didn’t add to the Roth after those five years they would still have more than $80,000 come retirement. That’s a nice legacy for you to build with them starting today.