Supercharging Your Child’s Retirement Savings

Ideally, your child would take advantage of the tremendous power of tax-free, compounding growth by setting aside savings from his or her first paycheck to fund a retirement plan.   The reality though is that most children don’t get around to saving for retirement until their mid-thirties.  A Roth IRA is an individual retirement plan in which assets grow tax-free and can be withdrawn tax-free in retirement.  You can make a tremendous difference in your child’s financial security by ensuring that they don’t pass up the opportunity to make contributions to a Roth IRA early in life even if they can’t afford to use their own paycheck to make the contribution.

Pat and Kristen’s Lasting Gift (this is a hypothetical example only)

Josh is a recent college graduate making $40,000. Between rent, basic living expenses and some modest credit card debt he is barely getting by. Pat and Kristen want to give their son a boost early in life but fear that the $7,000 of annual assistance they plan to provide can easily be squandered on cable, dinners out or other discretionary expenses. They also understand the power of compound interest, particularly in an account that grows tax‐free so instead of just giving Josh a few thousand dollars throughout the year Pat and Kristen decide to make an annual $7,000 gift to Josh so that he can fund a Roth IRA. Josh intends to take over the funding of his Roth IRA in ten years and assuming 7% growth if he just continues to add $7,000 per year, he would amass a $2,484,673 tax‐free account by his age 701. If Josh doesn’t contribute to his Roth for his first ten working years he would only save $1,213,916 by age 70.

By simply redirecting their financial assistance to ensure Josh doesn’t pass up early years of growth in a Roth IRA, Pat and Kristen might double the amount that Josh would have otherwise been able to accumulate in a Roth IRA because of the power of tax‐free compound growth.

Supercharging Your Child's Retirement SavingsWhy a Roth IRA?

A Roth IRA is an amazing retirement saving tool because the investments in a Roth IRA grow tax-free for the contributor’s lifetime and withdrawals aren’t subject to income tax in retirement. *  There are two types of individual retirement accounts:  Traditional IRAs and Roth IRAs.   While your child could choose to fund either type and earnings grow tax-free in both, it usually makes more financial sense for a young person to contribute to a Roth even though he or she would forgo an income tax deduction on each contribution.

With a Traditional IRA, your child gets an income tax deduction upfront with each contribution but each dollar accessed in retirement is ordinary income to your child.   This means that a $50,000 withdrawal in retirement from a Traditional IRA might mean $30,000 in your child’s pocket.  With a Roth IRA, your child doesn’t get an income tax deduction upfront, but the funds won’t be taxed again when withdrawn in retirement.

Key Roth IRA Rules

Funding Limit for 2024: the lesser of earned income or $7,000, reduced by any contribution to a Traditional IRA (Roth IRA contribution begin to phase out if your child’s adjusted gross income is above $146,000 if single or above $230,000 if married filing jointly).

Contribution Deadline for 2020:   April 15th of 2025 for a 2024 contribution.

Tax Consequences:  Funds you give to your adult child to fund his or her Roth IRA are not income to your child.   The funds you give your child are a gift but you shouldn’t owe gift tax or use your credit against gift tax when giving your child funds to contribute to a Roth IRA, provided that the total amount you give to your child for the year doesn’t exceed the $18,000 annual exclusion from gift tax in 2024.

*Distributions from contributions to a Roth IRA are tax-free but distributions from earnings are only tax-free if your child has had the Roth IRA for at least five years and is over age 59½ (or used for a first-time home purchase ($10,000 lifetime maximum) or due to death or disability).  State tax may apply.


If you could benefit from a conversation with our advisory team, we would be happy to provide a complimentary consultation.    


Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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