Parents Prioritize Giving The Next-Gen a head startNew research from Fidelity Viewpoints highlights teaching children ‘ the discipline to make wise financial decisions’. Reprinted with permission. Visit fidelity.com
BOSTON, July 26, 2018 –“Parents know that time is on their child’s side and want to encourage good savings habits as soon as they’re able to start earning their own money,” said Melissa Ridolfi, vice president of Retirement and College Leadership at Fidelity Investments. “Let’s be honest, convincing a child to hand over their hard-earned cash to invest in a Roth IRA may be challenging, but engaging in financial conversations when your child is beginning to understand the value of money can help them develop the discipline to make wise financial decisions later.”
Fidelity Investments® today announced growth in new accounts and total assets for its Fidelity® Roth IRA for Kids remain strong since the product was introduced in January 2016. From January 2016 through January 2018, new accounts have seen a 475 percent increase, with a compounded annual growth rate of 333 percent. Assets have increased 2,399 percent, with a compounded annual growth rate of 400 percent during the same period. Looking at 2018 alone, the product has realized a 39 percent increase in accounts and a 51 percent increase in assets from January through the end of June.
Average account size also increased to $3,801 at the end of June 2018 from $2,626 in 2016.i The growth is driven in large part by their popularity among parents with children under the age of 18 and relatives who want to give their kids a jumpstart on saving for the future.
A Roth IRA for Kids is a custodial account which can be opened and managed by any adult- a parent, grandparent, aunt, uncle or even a family friend- on behalf of a minor earning income. Qualifying income can come from a job or self-employment such as babysitting, mowing lawns, or shoveling snow. The earnings and withdrawals are free of federal taxes.ii
Tips for Convincing Kids to Part with Their Summer Job Money
Summer job season offers a timely opportunity for parents to start a discussion with kids about dedicating some of their earnings to a retirement account, though the idea may seem de-motivating to a teen who is excited to have their first taste of financial freedom. Here are three tips to make the ‘money talk’ go a little easier for kids:
- Start Small
Focus the conversation on how small their contribution can be relative to their total take home pay. Start by asking them to consider saving 10-15 percent: If they earn $100, that would be saving $10- $15. Later, emphasize the growth potential of that small savings to help them understand how small contributions can grow.
- Offer a “Match”:
To make the idea of saving even more appealing, parents may want to consider offering to “match” their child’s contributions, to give them a head start in understanding how an employer 401(k) plan works.
- Demonstrate How Saving a Little Can Go a Long Way
One of the biggest financial regrets Fidelity hears from those who procrastinated on saving for retirement is, “I wish I’d started saving earlier.” Talking to kids about saving some of the money they’ve earned is an opportunity for parents to demonstrate how time is on one’s side when it comes to investing, and perhaps offer personal examples illustrating why they wish they had started saving when they started their first job.With a long time horizon, even modest contributions to a Roth IRA can become a sizeable nest egg over time, thanks to the power of tax-free compound growth. The chart below illustrates how annual Roth IRA contribution amounts may potentially grow into impressive sums over a span of decades.
How Does a Roth IRA for Kids Work?
A Roth IRA for Kids provides all the benefits of a regular Roth IRA. Minors cannot generally open brokerage accounts in their own name until they are 18, so a Roth IRA for Kids requires an adult to serve as custodian.
The custodian maintains control of the child’s Roth IRA, including decisions about contributions, investments, and distributions. In addition, statements are sent to the custodian. However, the minor remains the beneficial account owner and the funds in the account must be used for the benefit of the minor. When the minor reaches a certain required age, typically either 18 or 21 in most states, the assets must be transferred to a new account in their name. Once the minor reaches age 21, he or she can request a transfer of the assets to their own independently owned account.
Other account features include:
- Tax-free earnings and withdrawals: Both are free of federal taxes.ii
- Eligible income: Minors must have employment compensation, but even if your kid did not land a job with an employer, the income can come from self-employment.iii
- Maximum contributions: IRA contributions cannot exceed a minor’s earnings. For example, if a minor earns $1,000, then only $1,000 can be contributed to the account. There’s an annual maximum contribution of $5,500 per child.
- No minimum investment: There is no minimum investment to open the account, however, certain investments like mutual funds require a minimum initial investment.
- Range of investment options: Roth IRAs for Kids have access to variety of investments offering growth or income, such as mutual funds, stocks, bonds, ETFs and CDs.
- Online courses: Fidelity’s Learning Center offers online courses to make it easier for kids to learn the basics of investing.
For additional information on Retirement and IRAs, please visit www.fidelity.com/ira or our Roth IRA for Kids landing zone. Fidelity offers relevant Viewpoint articles about kids and money, such as Turbocharge your child’s retirement with a Roth IRA for Kids and Taxes for Kids.
About Fidelity Investments
Fidelity’s mission is to inspire better futures and deliver better outcomes for the customers and businesses we serve. With assets under administration of $7.0 trillion, including managed assets of $2.5 trillion as of June 30, 2018, we focus on meeting the unique needs of a diverse set of customers: helping more than 27 million people invest their own life savings, 23,000 businesses manage employee benefit programs, as well as providing more than 12,500 financial advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for 70 years, Fidelity employs more than 40,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.
Keep in mind that investing involves risk.
The value of your investment will fluctuate over time and may gain or lose money.
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Fidelity Roth IRA for Kids Continues to Grow / Page 5
i Data from January 1, 2016 through June 30, 2018.
ii A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59 ½, death, disability, qualified first time home purchase.
iii Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see IRS Publication 590A Table 1-1.