School is about to start, so all the students who contributed to the just-released July jobs report are wrapping up those seasonal gigs.
Many of these young workers plan to use the money they earned to pay some of their college costs. Kudos for them for contributing to their educations.
But it's also a great idea for young people to start thinking about the day when they can quit working for good.
The problem is that too many young people, like a lot of us, don't think that far ahead.
Plus, a young person's summer job earnings are probably not enough to pay for their coming semesters and contribute to a retirement account.
Good news on this front. All you parents, grandparents, god parents or great family friends can help.
You can help open an account, preferably a Roth IRA, as long as you and the young worker meet some basic rules.
Why Roths rule: First, why go with a Roth? Because this retirement arrangement offers the best potential for tax-favored earnings over the years.
Money put into a Roth retirement arrangement is not tax deductible, but it will grow tax-free over the years. The best part is that when funds finally are withdrawn, they are tax-free.
By starting a Roth IRA early in your work like, a teenager has 50 or more years for the power of compounding to turn the account into a huge retirement fund. $1,000 into an IRA now will grow to $15,000 in 40 years assuming 7 percent annual return, and that's without any other money being added to the account.
And the new tax law has made Roths even more appealing.
With the changes to the tax brackets, a young worker doesn't even have to pay taxes on earnings until they exceed $12,000 (that's for 2018; the amount will be indexed for inflation in coming years). So there's no or little appeal of a traditional IRA's tax deduction.
Making enough money: OK, you agree. A Roth IRA is your young worker's best move.
And being a good parent et al, you want to help the young person make that move.
You can by providing the money for the account.
The only requirement here is that the young person earned money from a job. If so, then that youth is eligible to put, for the 2018 tax year, up to $5,500 into a Roth IRA.
Note the "up to" qualifier. That's the maximum for this tax year. The annual contribution limit also is reviewed each year for possible adjustment upward due to inflation.
If the young worker made only $4,000 this summer, then that's the most that can go into the IRA.
Custodial account: Most financial institutions or financial fund companies can help you and your young saver establish a Roth IRA.
If the account is for someone who is a minor — that's younger than 18 or 21, depending on your state's laws — the adult helping fund the savings will have to set up a custodial account.
You, the adult, are the account's custodian and the young earner is the beneficiary of the Roth IRA. When the youth reaches the legal age, he/she will take control of the account.
Other tax matters: As far as other tax considerations when giving a young person money for a Roth IRA, generally there are none.
Gifts, financial or otherwise, are not taxable to the recipient. Regardless of the amount or value received.
And the amount of a gift, as long as it doesn't exceed the annual per-gift exclusion amount, won't trigger any gift tax filing obligations for the giver.
You can give several thousand dollars a year to a person and not have to worry about the gift tax.
For 2018, the gift tax exclusion amount is $15,000 per person.
Since the annual contribution limit for a Roth IRA is significantly lower than that, you won't owe Uncle Sam anything as your Roth gift is the only one you make to the youngster this year.
The best gift, though is from the tax code and will be presented many years down the road when the young Roth IRA owner has enough in the account to make retirement possible and enjoyable.
You also might find these items of interest:
- 5 things to consider in choosing workplace benefits
- Retirement plan 2018 amounts unaffected by new tax laws
- Millennials' participation in tax-favored workplace retirement plans improves, but still lags other generations