My son is in a low paying job that puts him in the 0% or maybe 10% marginal tax bracket. Isn’t this a good time to top up your Roth IRA contribution by $6,000? We are considering giving them a gift to partially or possibly fully offset their contribution. Am I missing something?
You don’t seem to be missing anything.
If your child (or you) has the means to contribute anything to retirement savings, generally Roth Individual Retirement Account (IRA) As the vehicle to do this.
It’s great to have it out, but it’s definitely not necessary. That said, there are always things they don’t look at, and I can think of one or two situations where Roth would be uncomfortable. Those are different, but let’s see if that’s the case. (And if you have questions related to your personal financial situation, contact A Financial advisor.)
2 Reasons Your Child Shouldn’t Contribute to a Roth IRA
In general, there are two reasons why your child may choose not to fund a Roth IRA – or maximize – a Roth IRA.
Taxes. The biggest reason someone might choose another retirement savings vehicle over a Roth is if they expect to be in a lower tax bracket in the future. This does not seem to apply to your child’s case, but I will revisit it later.
College financial aid. The most likely reason your child won’t need a Roth is if they’re applying for college financial aid. Free Application for Federal Student Aid (FAFSA).. FAFSA-based award calculations base college financial aid on your family’s financial need.
Low-income students and parents often receive more aid than their higher-income peers. Parental income affects the amount of financial aid awarded, but student income has a greater impact.
A student’s income must be below $7,000 to qualify for maximum financial aid for the 2022-2023 school year. So, to stay within that limit as much as possible, you might want to start your child off with pre-tax traditional IRA contributions instead. The same logic applies to any other situation that requires you to reduce your reportable income.
Other than that, I’m hard-pressed to think of any good reasons for young people not to save in a Roth.
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Why Should You Consider a Roth for Your Child?
Roth IRAs are best suited for:
They are still far from retirement.
Expect to be in a higher tax bracket in retirement than you are now.
Both are certainly true for a low-income recent graduate, for example. So whatever savings your child can scrape together — even if they’re waiting tables and spending most of their paycheck on a downtown studio apartment — is worth putting into a Roth.
For one thing, their long term horizons mean that even a small principal can generate high returns after retirement. For another, your after-tax contributions will create significant savings over the life of the account, assuming you retire in your current high income bracket. That’s a reasonable assumption.
Let me show you how the main question is mentioned Parent gift To compensate the contribution of the child. This is a great method if you can afford it. While Roth contributions can’t exceed the account owner’s income (and they’re the only ones who can contribute in the first place), the IRS doesn’t care about reducing Mom and Dad’s cost-of-living burden.
In conclusion: While there are situations where other investment vehicles may be better, I’d say that, in most cases, the Roth is a great choice for young savers to start with. And if they have parents who are able and willing to spank a little, so much the better.
Graham Miller, CFP® is a financial planning columnist for SmartAsset and answers reader questions on personal finance topics. Have a question you want answered? Email [email protected] and your question may be answered in a future column.
Please note that Graham is not a participant in the SmartAdvisor Match forum.
Tips for managing retirement accounts
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