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Retirement for Teens?

Helping your children set up Roth IRAs now could pay off later–not only in sizable nest eggs, but also a solid grounding in financial basics

At age 16, it’s hard to see past college (or even the weekend), much less into retirement. But parents and grandparents tend to take a longer view, and helping your teens set up and fund Roth IRAs could potentially provide benefits in that far-distant time when their working days are through. The tax-deferred compounding and flexibility that make a Roth IRA a powerful savings tool for adults can be even more compelling for someone 50 years from retirement, says Charles Toth, Director of Product Management and Personal Retirement for Bank of America Merrill Lynch. These specialized accounts also create unique teaching opportunities that can help your children get an early start on becoming savvy and sophisticated investors, Toth says.

Learning what 50 years can do

One financial basic a Roth IRA can teach is the power of compounding. As an abstract concept, the notion of building on returns year after year may not resonate with a 16-year-old. But show how savings might grow in a Roth IRA over half a century and even the most jaded teenager may sit up and take notice. For example, an investment of just $2,000 annually in a Roth IRA for the next four years can grow to more than $450,000 in 50 years, assuming an 8% annualized return. “That kind of eye-popping future benefit can go a long way in communicating to younger people the importance of developing good savings habits,” says Toth.

This could also be a good time to introduce your teens to the realities of taxes (and tax deductions). Teenagers may initially be put off when you explain that, unlike contributions to a traditional IRA, money going into a Roth can’t get deducted from a person’s taxes. They’re likely to brighten, however, when you point out that workers who earn less than $5,700 a year don’t have to pay income taxes. A teen with a $10-an-hour job could funnel all of his or her savings from the next few summers (up to $5,000, the maximum total yearly contribution to any kind of IRA for those under age 50) into a Roth IRA and, decades from now, potentially withdraw a few hundred thousand dollars without ever having to pay federal income taxes on any of it.

Of course, investments can also lose value and a Roth IRA can be an effective vehicle for teaching teens other investment basics, such as the importance of diversification, sound fundamentals and the trade-offs between risk and return. Toth recommends sitting down with your kids to research and select the investments together. “When you’re investing for so many years, you can really see how the extra risk of equity investments may pay off in better returns compared with certificates of deposit or money market funds,” Toth says.

Continued here…

Published by Merill Lynch at www.totalmerrill.com
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