Roth for a kid?

[wolfpup]

Since you mentioned he is being paid as a 1099 contractor. Keep in mind that the amount your able to contribute is the taxable amount. So if your going to deduct farm expenses and such against this income on his personal tax return, then you can only contribute the netted amount up to $7,000.

Roth needs to be held 5 years, and can be withdrawn for a few special items such as first time homebuyer so earnings can accumulate until then.

 

[2rocky]

The money will be saved for retirement and or to buy a farm. His plans are the Air Force Academy but he will apply to West Point also, and maybe the Coast Guard Academy. He wants to do his 20 years and retire and have a little farm. I hope it all works out for him. I don’t want him having to work like I do. I’m behind both my kids 100% and support them the best I can.

If he goes Coast Guard route one of the few Tracens on the West Coast is down the road from me.

 

[jimh406]

The problem with any IRA is getting money out. That's ok if you make it to retirement age, but otherwise, not that helpful. I suggest an account that allows him to invest in mutual funds. They are fairly diversified by default which you can increase by picking a few different ones that are in different industries like Software, Retail, and Medical, for instance. You can look up the return rates for different year periods.

 

[npaden]

It’s just so hard for me to tell someone that young to pass up the huge tax advantage with a Roth IRA.

I have some money in a brokerage account right now that is almost untouchable for me because the giant unrealized gains in it. Even with the capital gain tax at 20% I have to pay the extra 3.8% Obamacare investment tax so essentially 24% tax on those gains.

I ended up borrowing money and paying interest on my recent land purchase instead of selling investments and paying tax. I’ve been donating some of the appreciated investments to charity to get some use out of them which works okay, but that’s a far cry from buying a farm with them.

I would put the money in a Roth and let it appreciate tax free and down the road he could save the money up to buy a farm or whatever he wants and he should have the money in his retirement to allow him to enjoy it.

 

[RemingtonRules]

The problem with any IRA is getting money out. That's ok if you make it to retirement age, but otherwise, not that helpful. I suggest an account that allows him to invest in mutual funds. They are fairly diversified by default which you can increase by picking a few different ones that are in different industries like Software, Retail, and Medical, for instance. You can look up the return rates for different year periods.

See my earlier post as this is not exactly accurate

 

[jimh406]

See my earlier post as this is not exactly accurate

Your post was incomplete of course. My point is that retirement accounts are just that. There are rules if you aren't 59 1/2. There are also limits to how much you can contribute to a Roth per year.

Charles Schwab

Age 59 ½ and under​

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

Withdrawals from a Roth IRA you've had less than five years.​

If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

• You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
• You use the withdrawal to pay for qualified education expenses.
• You use the withdrawal for certain emergency expenses.
• You use the withdrawal for qualified expenses related to a birth or adoption.
• You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you're unemployed.
• You become disabled or pass away.
• You are a survivor of domestic abuse.
• The distribution is made in connection with a federally qualified disaster.
• The distribution is made due to an IRS levy.
• The distribution is made in substantially equal periodic payments.1

Withdrawals from a Roth IRA you've had more than five years.​

If you're under age 59½ and your Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:

• You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
• You become disabled or pass away.

 

[antelopedundee]

So my son who is 16 has his first "real" job this summer. He wanted to get a summer job with his buddies and is working the boat launch pay booth at the lake. He puts up some hay and sells a few hogs and steers every year but this is his first 1099 job. So my question is would he be better to do a Roth which I believe he can put his whole check into? Or set up a brokerage account like with Fidelity? I want something he can easily use and not be tied to locally since he will be leaving for the military in a year and a half and I want him to be able to add to it. He makes enough farmimg to keep him in spending money and when he goes to the military he will probably sell his hay eqipment and have about $15K to add to something. Just wanting to get him going on the right path and learn to keep adding and never get into the account and he will be sitting pretty good later in life.

At Fidelity [and others] you can have both the Roth and brokerage account. It would be a self-directed IRA. It has to come from earned income.

https://www.investopedia.com/terms/e/earnedincome.asp#Understanding_Earned_Income

One can't contribute more than the amount of earned income up to the contribution limit. There are penalties for early withdrawal.

I read recently that Vanguard is starting to charge PITA nickel and dime fees thus I suggested Fidelity.

 

[RemingtonRules]

Your post was incomplete of course. My point is that retirement accounts are just that. There are rules if you aren't 59 1/2. There are also limits to how much you can contribute to a Roth per year.

Charles Schwab

Age 59 ½ and under​

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

Withdrawals from a Roth IRA you've had less than five years.​

If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

• You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
• You use the withdrawal to pay for qualified education expenses.
• You use the withdrawal for certain emergency expenses.
• You use the withdrawal for qualified expenses related to a birth or adoption.
• You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you're unemployed.
• You become disabled or pass away.
• You are a survivor of domestic abuse.
• The distribution is made in connection with a federally qualified disaster.
• The distribution is made due to an IRS levy.
• The distribution is made in substantially equal periodic payments.1

Withdrawals from a Roth IRA you've had more than five years.​

If you're under age 59½ and your Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:

• You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
• You become disabled or pass away.

Oky doky

 

[sigpros]

So it looks like he really needs to do both? Like put his job money in a Roth and when he sells his equipment he could put that in a brokerage account. A question on the Roth ihe grosses $2K can he put the whole $2K in the Roth or just the ammount he nets after taxes?

 

[homers]

100% of earning can be put into Roth IRA up to $7000 in 2024

 

[SAJ-99]

100% of earning can be put into Roth IRA up to $7000 in 2024

Probably should be pointed out that you must have earnings. He couldn't sell the equipment for $12k and put $7k in the Roth if he didn't have $7k in income to offset.

 

[Deleted member 56631]

Do the Roth IRA. It’s your money and you can absolutely withdraw money from it any time, many brokerage accounts will make you account for the taxes at the time of withdrawal and hold that money for the taxes on that calendar year.

 

[MontanaBlades]

So my son who is 16 has his first "real" job this summer. He wanted to get a summer job with his buddies and is working the boat launch pay booth at the lake. He puts up some hay and sells a few hogs and steers every year but this is his first 1099 job. So my question is would he be better to do a Roth which I believe he can put his whole check into? Or set up a brokerage account like with Fidelity? I want something he can easily use and not be tied to locally since he will be leaving for the military in a year and a half and I want him to be able to add to it. He makes enough farmimg to keep him in spending money and when he goes to the military he will probably sell his hay eqipment and have about $15K to add to something. Just wanting to get him going on the right path and learn to keep adding and never get into the account and he will be sitting pretty good later in life.

Saving for retirement takes discipline. If he were to fund that Roth and invest in low cost index fund, he won’t regret it when he retires. I am doing this for my daughter.

 

[cusecat04]

I am doing this with my daughter as well.
Last year was her first year with earned income allowing her to start a Roth.
Not a ton of money but we are doing a match approach with her to allow her to spend some money and also fund up to what she earns.

I would also second the Fidelity suggestion; have a few different accounts through Fidelity and the ability to have Brokerage, Trad/Roth IRAs, CC, and a money market all viewable is helpful.

 

[Birddog916]

I have had good luck putting away short-term dollars into Acorns. Acorns is an app that invests in ETFs. I stash funds in there mostly for hunts and home improvement projects, but don't tell my wife about the hunts part.

 

[22Cosint]

Can’t go wrong with teaching the value of a dollar and how TVM works at a young age! They will thank you for it one day.

 

[mdhunter]

I agree with the thought of “do a Roth”. If you can afford it, give them the money to do it. The downside is it becomes their money at an early age. Anyhow, if their head it’s screwed on straight I would suggest it.

 

[David Gough]

After the roth don't overlook starting an emergency fund for him. Put some funds into a money market account and let it grow. He's in a 0% tax bracket (and I don't think it would be enough for him to pay the "kiddie tax").

Too many young adults, and many older adults, can't afford a large unexpected expense.

 

[Bonasababy]

Your money grows faster in pre tax than Roth. People focus so much on the future tax angle they forget about earnings! There are things to think about and Roth is not the best choice for everyone. And both might make sense too. Talk to an accountant, not folks on a web board.

I can't imagine any financial advisor would recommend a retirement account for money you intend to pull out before retirement either. Better to have that money in a brokerage account with no load/low or no fee options IMO.

 

[npaden]

Your money grows faster in pre tax than Roth. People focus so much on the future tax angle they forget about earnings! There are things to think about and Roth is not the best choice for everyone. And both might make sense too. Talk to an accountant, not folks on a web board.

If you do the math they are identical on earnings. The pretax option will grow larger but when you withdraw it and pay taxes you end up in EXACTLY the same place assuming the tax rates are the same.

The reason people focus so much on the tax angle is because that is the only thing that matters. Is your tax rate now higher or lower than what you think your tax rate will be when you withdraw the funds.

Not sure why you would need to talk to accountant to tell you how to do basic math.

Having an opportunity to put in tax advantaged money at a young age can be a true game changer.