Donald Trump (or Hillary for that matter) Doesn't Have One But Maybe Your Kid CanSubmitted by Financial Planning Solutions, LLC on December 29th, 2016
A little over a year ago, I wrote a blog post titled, "Donald Trump (or Hillary for that matter) Doesn't Have One But Maybe Your Kid Can"
Since that was written, we know that Hillary can't have one but we really aren't 100% sure if Donald can.
I'm talking about a Roth IRA.
Hillary's income does not allow her to make a full 2016 contribution to a Roth IRA as her income exceeds the threshold of 184k for those married filing jointly.
Now Donald, on the other hand, may be eligible, as we have not ascertained what his income actually is. Once he is in the White House, rumor has it he will forego the 400k salary and only take $1.00.
Only time will tell how all of that plays out but the good news is, if your child (regardless of age) has earned income from some type of work, they can contribute up to $5,500 a year assuming they earn at least that much. If they earn less, they can contribute 100% of their income. Just like Hillary (and possibly Donald) if they are filing single, and their Modified Adjusted Gross Income exceeds 117k, they can't make a full contribution either.
Why do I love the Roth IRA? Well, it is a great investment vehicle as your money grows tax-free. (based on certain guidelines) Even if you are 50 years old (and you fall under the guidelines), a Roth can be a great strategy to accumulate wealth over time. If you are over 50, you can put away up to $6500 for 2016 or 2017 if you earned at least that much.
The younger one is (and the reason for this blog post) is that when making these contributions at a younger age it can allow for more years of tax-free compounding.
Here is a hypothetical example (this is just an illustration and not by any means a guarantee. Investing carries certain risks that one should understand and be comfortable with before investing)
Let's say Elizabeth is 16 and earning $4,800 a year at Whole Foods. She establishes a Roth IRA and puts in $2,500 a year. She continues working throughout the years and even though her income increases, she never contributes more than $2,500 a year. She does this until she is 36 when her income increases enough that she is ineligible to contribute to her Roth.
Let's look at the numbers:
- Her contributions total $50,000 ($2,500 a year times 20 years).
- She leaves the account alone and agrees to not pull money out until she is 65
- If we assume she receives an average return over this period of 7% (again, no guarantee)
In this example, Elizabeth could have close to ¾ of a million dollars at age 65. If she can hold out to age 70 she could have over a million dollars. (No guarantee. Account may lose value). Unlike a traditional IRA, Required Minimum Distributions are not required after age 70 ½ so if Elizabeth didn't need this money she could leave it to her children.
Got a working kid?, I am happy to walk them through what a Roth IRA can do for them. I wish these were around when I was 16.
P.S. The deadline to open and fund an IRA is April 18, 2017 but time is ticking so please reach out to us sooner than later.
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