My 22-year-old D made about $7K last year and anticipates making around $27K this coming year. I’d like to seed a retirement fund for her (and I told her NOT to expect this to be a recurring thing I"m not sure if I should open a Roth IRA or a traditional one? My original thought was for a traditional, but she doesn’t have enough income for it to provide her a tax deduction.
If you were to do this for one of your kids, what (if any) restrictions might you put on it? I would like her to to use this for retirement – not a house down payment or emergency fund withdrawal. Since she is not currently married, but has a serious boyfriend, I’d like her to name me as beneficiary until such time that she actually ties the knot.
We encouraged our kids to set up their own retirement accounts and they did so. As adults, they decided who their beneficiaries should be. To be honest, if this is their account, this is the way it should be.
I would offer to give her the seed money. We gave our kids $1000. One kid set up a Roth, and the other a 401k because her work matches contributions up to a certain amount.
Since our money was a gift for this purpose, we put no restrictions on it at all.
You do know that she could name you as beneficiary the day she sets up the account…but could change it the next day to whomever she chooses. Not saying she would…but she could. It is her account.
My son set up a Roth Ira because he figures he is at the lowest tax bracket now for a very long time, and hopes he’ll be in a higher one in the future.
Agree that a Roth was what we encouraged S to fund as well, as we figure his income will only increase over time, even tho he’s already in the 25-28% tax bracket. He also contributes the max to 401k that employer matches some of as well.
We have been advised to open a Roth as soon as D has earned income. You can fund it with your money as your gift to your child and the annual $5500 is below the $14,000 annual gift limit, if that’s what you want to do. I just plan on telling D that she cannot touch this money except for retirement purposes. Sometimes a simple admonition actually works in my experience (especially when she understands the advantage of the Roth IRA). It would be a good learning experience for her as well to start early, which may be more valuable than the money in the early days.
We opened Roth IRAs for both our 20-somethings this year – look for something with low or no- fees, and a relatively small buy-in amount (we aren’t made of money, ourselves). We set it up in their name, and we will automatically contribute a little bit every year until they can do that themselves.
As far as restrictions, no, we did not impose any. In the end, they are adults and deserve to do what they need to with the money, when they need to do it. They are named as each other’s beneficiaries. We did all the paperwork and fund-choosing over the Christmas break and it was actually pretty interesting and bondy, as weird as that sounds.
I started my son with Roth IRA at fidelity, with the easy age of retirement fund. When he took over, he shifted the fund. He didn’t consult me, but after all, it is now his.
To open an IRA, Roth or traditional, one must have earned income. Unless this child had earned income as a toddler, this is not possible.
As for the OP’s question: Roth. Absolutely a Roth. Especially since the child doesn’t even have taxable income. What’s the point of a deduction? But even if there were some earned income, at that tax rate, a Roth is a huge advantage over a traditional.
Cincy gal’s advice was spot on.
I also agree with the restrictions. If you’re going to make it a gift, there should be no restrictions. Once it’s hers she can do with it as she pleases anyway.
I would, however, also strongly encourage them to save on their own. You don’t learn how to do something if someone does it for you.
I"m not sure if I should open a Roth IRA or a traditional one? My original thought was for a traditional, but she doesn’t have enough income for it to provide her a tax deduction.