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Marquette Financial Planning Note - Roth IRAs for Children and Young Adults Thumbnail

Marquette Financial Planning Note - Roth IRAs for Children and Young Adults

College Planning Investment

Happy Labor Day from the desk of Marquette Wealth Management's Director of Client Service, Valerie Thomas!

I hope this note finds you well and enjoying and savoring the final days of summer! 

Many of our clients' children and grandchildren had summer jobs or internships this year. While earning a paycheck is exciting, it can also be an excellent time to consider opening a Roth IRA and contributing a portion of their summer earnings. Not only does this jump-start retirement savings from an early age, but it can also serve as a positive learning experience about the principles of saving, investing, and cultivating long-term wealth.

Kids can sometimes be reluctant to invest their summer earnings, so some parents and grandparents opt to make the full allowed contribution (for 2024 it is the lessor of $7,000 or earned income for taxpayers under age 50) or a portion of the allowed contribution on behalf of the working child.

The Roth IRA offers a unique combination of tax advantages and flexibility, making it an excellent choice for young savers.

Here are a few key benefits:

  • Tax-free growth: Roth IRA contributions are made with after-tax dollars, so your child won't pay taxes (and perhaps penalties) until they make withdrawals.
  • Penalty-free withdrawals of contributions at any time: Your child can withdraw up to the amount of their total contributions at any time, for any reason, without paying taxes       or penalties.
  • Early withdrawals of earnings: If your child withdraws amounts that exceed their contributions before age 59½ or before the account has been open for five years, they             may face taxes and a 10% early withdrawal penalty on the earnings portion of the withdrawal.
  • Exceptions to early withdrawal penalties: Your child can withdraw funds before age 59½ or before the account has been open for five years for several reasons (keep in           mind that you may be able to avoid penalties but not taxes on any earnings), including:
    • Funds can be used for qualified higher education expenses. 🎓
    • First-time home purchase (up to a $ 10,000 lifetime limit). 🏠
    • If your child becomes disabled. ♿
    • For certain emergency expenses. 🚑
    • If your child is unemployed, they can use a withdrawal to help pay for health insurance premiums. 🩺

Source: www.irs.gov

The flexibility and withdrawal choices for a Roth IRA can make it an attractive choice for young savers who may need access to their money in the future while still providing a powerful tool for long-term wealth building.

 I and the entire Marquette team welcome opportunities to help support financial education and literacy for young people, so please feel free to share this retirement savings topic with an individual or family who might find it useful. Also, as always, we are here to answer any questions to help you and those you care about throughout your financial journey. 

 Valerie Thomas, Managing Director - Client Service