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.

 

136088

 

Teachers Insurance and Annuity Association of America has sponsored Ask the Expert posts for
informational purposes only. Many of the experts are unaffiliated with Teachers Insurance and Annuity Association of America, College Retirement Equities Fund, and their affiliates and subsidiaries (collectively TIAA), and TIAA makes no representations regarding the accuracy or completeness of any information on the posts or otherwise made available by the experts.
Statements of external featured experts are solely their own and are not endorsed or recommended by TIAA.

Responses from experts to questions posed by Woman2Woman community members are intentionally general in nature and are not intended to give personal, financial, or specific advice.

 

Some strategies are complex, and more information is often needed to determine the personal needs of a community member. We strongly recommend that you consult with a financial advisor before taking any action based on an expertʼs response or other information you obtain from the Woman2Woman: Financial Living site so that all of your personal circumstances can be taken into consideration. Participation in the site does not render the member a client of the expert or of TIAA.

 

This site is not designed to accept or respond to requests or complaints regarding specific TIAA accounts, products or services. If you wish to discuss an issue of that nature, please contact TIAA at 800-842-2252. TIAA is not responsible for any opinions provided by members of this site. TIAA is not responsible for the content or privacy policies of third-party sites to which you may link.

 

Any tax information provided is not intended to be used, and cannot be used, to avoid possible tax penalties. TIAA and its representatives do not offer tax or legal advice. You should consult an independent tax or legal advisor for advice based on your own particular circumstances.

 

The material and responses are for informational or educational purposes only and do not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. The material and responses do not take into account any specific objectives or circumstances of any particular individual, or suggest any specific course of action. Investment decisions should be made in consultation with an investorʼs personal advisor based on the investorʼs own objectives and circumstances.

 

Certain products and services may not be available to all entities or persons.

 

Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.

 

Experts may not have medical or scientific training. Any information related to physical or emotional health is not intended to be used in place of a consultation with a physician.

 

TIAA is not responsible for the statements of community members. We may link to posts made by community members only to direct you to topics that may be of interest to you. This does not mean that we agree with the opinions of these community members. Their statements are solely their own and are not endorsed or recommended by TIAA.

 

TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.

 

© 2017 and prior years, Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, New York, NY 10017