Summer Planning Tip

In Financial Planning, Tax Planning by Landmark Financial Advisors, LLCLeave a Comment

It’s a dreary Friday morning so I thought it would be good to do a little writing.  Summer is winding down as today is the last day of trading for the month of July.  The passing of July means that summer is slowly coming to an end.  My daughter put in her notice for her summer job, which reminded me of a planning tip that is available for most of our clients to consider.

A child or grandchild that has/had a summer job has earned income.  As such, consider making a gift of a Roth IRA contribution for that child.  The 2016 limit is $5,500, but the amount contributed cannot exceed the child/grandchild’s 2016 W2 earnings.  As an example, if your child/grandchild only made $2,000 for the summer then that would be the maximum you could gift to a Roth IRA for them.

A Roth IRA for a young person has significant benefits. The earnings grow tax-free and can be taken out tax-free after turning 59 1/2:

  • Your contributions can be withdrawn tax-free at any time.
  • Up to $10,000 of earnings can be taken out tax-free and penalty-free to buy a first home.
  • Earnings can also be used tax-free and penalty-free to pay for qualified education expenses.

Why not make it a challenge?  Consider telling them you will match their wages in a Roth IRA up to maximum limit of $5,500 as an incentive for them to work.  I have always thought it was important for kids to work during the summer.  The main benefit is that they usually figure out pretty fast that education does matter, and that they don’t want to have that summer job the rest of their life.

If you contribute $2,000/year from age 16-22 (school age) growing at 5%, your $14,000 total gift would grow to $132,709 by the time they are 65.  Increase the gift to $5,500 a year and the total value increase to $364,950 at age 65.

Just a thought…. have a great weekend and enjoy these last days of summer!

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