In Part 1 I shared my enthusiasm for the Roth IRA: If you got this far, the battle is half won.


But your kids may need some more convincing before theyʼll put a single dollar from their summer job into one. A simple math lesson might be a good place to start.


1) Let the numbers speak for themselves

Your teen, in fact most of us, may contribute as much as $5,500 in 2017 (or their taxable compensation for the year, if that amount is less than $5,500). So, if my son takes $5,500 in savings and puts it in a Roth at age 15, it can potentially grow to $69,535by the time he turns age 67, assuming a 5% annual rate of return and no withdrawals. If he waits until age 25 to put in that same $5,500, his balance at 67 will only be $42,689.


Like other habits formed at an impressionable age, contributing may prove addictive. If my teen gets hooked on investing $5,500 every year until he turns 67, his IRA balance can potentially look more like $1,414,280 by the end.*


2) Incentivize your teen with a “parental” match

Realistically, you may only persuade your teen to put a portion of their earnings into an IRA. To help sell them on the idea of long-term investing, you might offer to match every two dollars they put into their retirement fund with a dollar to spend on themselves (like an employer match, except your matched dollars go towards treats). A valuable early lesson in financial incentive.


3) Explain the versatility of a Roth

At 16, retirement can seem a lifetime away. A major selling point of the Roth is its flexibility, since there is one big life event for which your adult child may withdraw their funds early. As long as the IRA has been established for at least 5 years, up to $10,000 may be distributed from it, penalty- free, to go towards the purchase of a first home. As with traditional IRAs, distributions may avoid the 10% penalty if the proceeds are used to pay for qualified higher education expenses or to fund certain medical costs. Read more about Roth IRA distribution rules here. Obviously, the IRA was designed to be untouched until retirement—but knowing there is some flexibility can have a big psychological effect.


4) Share the sense of pride that comes with stock ownership

Nothing gets a teen more invested in, well, investing than watching their dollar value over the years—while learning that stocks can go up and down, causing investors to potentially lose as well as make money. So get your young investor set up online to track their investments, though daily monitoring is never a good idea for long-term investments. A properly diversified portfolio can help create a sense of greater financial and emotional preparedness, as well as encouragement
to stay the course.


“If youth knew, if age could.”

Although I donʼt envy teenagers the peer pressures and raging hormones, I am jealous of their time horizons—all that potential, not just for themselves but for their invested dollars. When I think of all that tax-free compounding, it makes me wish I was sweet 16 again!


Note: Investments pose risks and you can lose money.


* This discussion was intended to show hypothetical examples of the principle of compounding. The impact of any investment fees, expenses or taxes that would be associated with an actual investment was not included. If such costs had been taken into account, the results shown would have been different. These examples are not intended to predict or
project investment results.
They also do not factor in market volatility.




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