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Once you’ve decided that opening a Roth Individual Retirement Account for your child is a great idea, now comes the hard part. It’s about convincing your children to save for their distant future retirement instead of spending their hard-earned money.
Here are some ideas for making your case to your child.
While doing so, it’s also important to consider what counts as “earned income” for your child’s Roth IRA.
How to get your kids started saving for retirement
By encouraging your children to save, you can achieve long-term financial success. Here are some ways to do that.
Start a “Parental Match” program that contributes extra money, say, an additional $5 for every $10 of earnings you put into your Roth IRA. We offer tangible rewards every time you reach your savings goals. Graphs and apps can help you keep track. Set up a “savings challenge” where everyone tries to save a certain amount each month. The person who saves the most or reaches their goal receives the reward.
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Encourage them to round up all purchases to the nearest dollar and save the difference. For example, if the price is $4.50, you will save the remaining 50 cents. Offer to pay interest on the money your child saves. You can set it to add a small percentage, such as 5%, to your savings every month or quarter. This teaches your child to earn money by saving through compound interest. Motivate your child to take on additional chores or small jobs, such as babysitting, helping around the neighborhood, or tutoring. Then, encourage them to save a portion of their income by offering a bonus if they save a certain percentage. If you’re starting a small business, such as selling crafts on Facebook Marketplace or Etsy, offer to save a portion of your profits and match those savings. Give small rewards to celebrate big savings milestones, like saving your first $100. It could be a favorite snack, a day out, a new book or game. Reinforce positive behavior by recognizing your savings in front of family and friends.
Make a case for saving and investing
Use this opportunity to explain how compound interest works and show how even small amounts can grow over time. If your child wants to spend money on a particular item, ask them to save the same amount before allowing them to buy.
For example, if you want to buy a toy that costs $30, you must first save $60. Half of it goes to savings and half goes to toys. This strategy encourages you to balance savings and spending. Instead of monetary rewards, offer money-saving perks like extra screen time, later bedtimes, or special outings.
This can make the idea of saving more appealing, especially for young children. As a reward for consistent savings, give yourself more independence, such as managing some of your household finances.
Teach financial literacy and lead by example. Let your kids help you choose Roth IRA investments. Knowing how your money will grow through smart investments is a powerful motivator. Create a family investment club where the whole family chooses stocks and other investments. Offer a small prize to the person whose investment performs best within a certain period of time.
Regularly discuss your own savings goals and progress with your child. When they see you prioritize saving, they’re more likely to do the same.
Work with your family on their savings goals, like vacations, and help them understand how their contributions can help them reach their goals faster.
Encouraging children to save is about making it feel rewarding and fun. These strategies will help your child develop strong financial habits that will benefit them throughout their lives.
How to Earn Roth IRA Contributions
To contribute to a Roth IRA for a child, the child must have income. This income can come from traditional employment, such as part-time work, or self-employment activities, such as babysitting or mowing lawns.
The annual contribution limit for 2024 is the lesser of $7,000 or the child’s total annual income. Allow a generous parent or other sponsor to keep some or all of the income the child earns and fund the Roth, as long as the contribution does not exceed the child’s income, if they so choose. You can.
What counts as earned income for a Roth IRA?Earned income is money you receive from work or services rendered, and to make sure your child’s contributions comply with IRS rules. It is important to understand what the conditions are.
Wages and salaries:
Paid internships: Most college campuses now have internship offices that can help you find paid internships. This provides you with the opportunity to earn money while developing skills and building networking relationships for your future career aspirations. Part-time jobs: Income from part-time jobs, such as working at a grocery store, fast-food restaurant, or retail store, counts as earned income. For example, if a 16-year-old child works at a coffee shop and earns $4,000 over the summer, that $4,000 would be considered earned income. Formal employment: The most income comes from formal employment, where the child receives a W-2 form. A simple type of qualifying income. This includes hourly wages, salary, and tips.
Self-employed income:
Babysitting: Money earned from babysitting jobs is considered self-employment income. For example, if your teen earns $1,500 over the course of a year babysitting, this amount can be used to contribute to a Roth IRA. The same goes for your neighbor’s lawn and yard work. Tutor: My son has done this quite a bit. Teaching other students in person or online is also eligible. Selling arts and crafts: If your child sells handmade crafts or artwork at local fairs or online and earns income from these sales, it qualifies as earned income. Gig economy jobs: Income from online platforms where minors may provide services such as graphic design, writing, and coding are counted as earned income. Delivery jobs: If age restrictions allow, income from food delivery jobs through services like DoorDash and Uber Eats also counts as income. .
What doesn’t count as earned income: Money you receive from your parents for chores or allowances doesn’t count, nor do cash gifts, investment income, scholarships, or grants. This last category is considered tax-exempt income and cannot be used to contribute to a Roth IRA.
— Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, based in Irvine, California. She is also a member of the CNBC Financial Advisor Council.
