Kids Earning Money? Set Up a Roth IRA

I took Nathan and Ryan to our broker this morning to discuss Roth IRAs. Both boys have jobs and I thought it was time to have them begin thinking about their retirement. John and I decided to match any money they made this summer, dollar for dollar, and, well, my boys have never been known to turn down free money. They were all in.

I could have easily set up their custodial accounts online but I wanted the boys to have the experience of meeting with an expert. Besides, I’m not all that familiar with Roth IRAs, I had a few questions to ask, and I wanted them to learn right alongside me.

Our broker started by asking the boys what they already knew about Roth IRAs. Nathan volunteered that it was a retirement account that they wouldn’t be able to touch until they were 65 (turns out it’s 59 1/2). Ryan offered the fact that taxes were taken out before the money gets deposited into the account allowing for the money to be drawn tax-free later on. I was proud of both of them for being able to discuss the basics of these types of accounts.

I know it’s hard for many kids to even entertain the notion that one day they will be retired. It’s even harder to get them to begin to prepare for it. I’ve been lucky in this area with Nathan and Ryan. They’ve sat in enough of my money classes to know that they are in the best position now to set themselves up for financial freedom later in life. A little sacrifice now can pay greatly later.

When our broker started talking about the compounding effect of money, and having money work for them, Nathan and Ryan started to smile. They know all about it. In fact, once kids see the power of compound interest, they’re usually quite interested in making those sacrifices.

We then got into risk management. The question posed both boys was What would you do if your account value dropped by 10%? Sell, stay put, or buy more? It was an interesting question and I was curious what each would say…although I already knew.

Ryan said he’d buy more. Nathan said he’d stay put. Ryan has made a killing on his stock picks this year; he’s a little bit more of a risk-taker. Nathan is simply not willing to lose money if he has a choice. This fits in with the next question: When are you looking to retire? Under any other circumstances this would have been an odd question to pose a 15- and 17-year old. But we were in his office to discuss retirement, so it was totally appropriate.

Ryan wants to have the option of retiring when he’s 40. Nathan said he probably wouldn’t retire any time before 55. With this information, our broker created personal target funds for each of them. Then he printed them out. That alone was worth the 45 minutes in his office. The boys were fascinated with these pieces of personalized information and devoured them in the car ride home. Very cool.

And me, all I could think about in that car ride was how I was jyped of information when I was a teenager. Had I known then what I know now, I’d have left that office in my flip flops ready to head out to the beach and work on my tan.

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