There is no better - and yet seemingly ridiculous - time to save for retirement than in your late teens and early 20s.

Saving that early maximizes the power of compound growth. But suggesting to a teen with a summer job or after-school gig to focus on a goal 50 years away is a bit much. And even once your kids have launched into adulthood, saving for retirement in their 20s can also be a nonstarter when they are trying to make rent, save for a down payment, stay on track paying down their student loan and, justifiably, spend a little on having fun.

That's where the Bank of Mom and Dad (and grandparents too) can step in with financial help that will go a very long way toward making sure the kids will be all right.

You're likely already helping an adult child. A recent report from Merrill Lynch Wealth Management and Age Wave estimates that parents shell out $500 billion a year in support of adult children (between the ages of 18 and 34). Helping with groceries, car expenses, school expenses and vacations are common ways parents lend a financial hand.

Retirement savings should be a priority. Especially over bankrolling vacations or helping an adult child buy a too-nice car. (I've explained the downside of fancy car buying here: https://www.rate.com/research/news/truck-purchase-retirement-savings.)

And a Roth IRA is the perfect way for parents to jumpstart their child's retirement security.

Solving your kid's retirement problem before they even know they have one

A quick eye-opener: Let's say someone saves $3,000 a year from age 18 through 22 in a Roth IRA, and then $6,000 a year from 23 to 30. ($6,000 is the current annual limit for anyone younger than 50.) By age 30, they've got more than $70,000, assuming a 6% annualized growth rate. Let's also assume that after 12 years of contributions ($57,000 in all), they decide to stop saving more, but keep the savings growing for another 40 years. That $57,000 will have grown to more than $720,000. Make that $720,000-plus, tax free. That's the retirement glory of a Roth: All withdrawals are tax-free.

If, however, the young adult doesn't focus on retirement saving until age 40, they will need to stuff retirement accounts with $8,700 a year for 30 years to land at age 70 with the same $720,000 or so. That's a total of $261,000 in contributions to end up with the same account value that would require less than $60,000 of contributions if they got that early start.

And to be clear, this scenario of stopping saving at age 30 illustrates the power of compounding when you start early. But the big win will come if your kid continues to add to the pot. Let's say at age 31 your child takes over and keeps investing $6,000 a year for the next 40 years. At age 70 your child is looking at a retirement stash worth $1.7 million.

All courtesy of a well-timed early parental push out of the savings gate when the kid was a teen. And let's not forget: An adult child with robust retirement savings allows their parents to enjoy their own savings in retirement.

They earn, you contribute

Anyone with earned income that is reported on a W-2 or a 1099 is allowed to save money in a Roth IRA. But your children don't have to fund the IRA with those earnings. This is where Mom, Dad, grandparents and fabulous aunts and uncles can rally 'round. Everyone can gift the money. That is totally kosher with the IRS.

The only rule is that whatever is contributed to their Roth IRA can't be more than their earned income for that year. So if your kid is going to make $1,500 in a summer job, you - and anyone else for that matter - can give your child a total of $1,500 to open a Roth IRA. There's no gift-tax reporting you need to do. In 2019, anyone can gift someone else up to $15,000 without any paperwork. (For the record, you can gift even more, but you'll need to file a gift-tax report with the IRS. Under current law, you won't owe any tax - it's just a reporting requirement - unless your lifetime estate and gifting totals more than $11.4 million, or $22.8 million per married couple. Not an issue for you? Us either.)

Another option is to help them build their savings muscles by requiring them to chip in just a little bit, and then you step in with a generous matching contribution. Maybe for every $1 your child kicks in, you match it with $5 or $10. The formula is up to you. Just remember, especially with teens, the goal is to encourage them to save, not turn them off. A hefty match should do the trick.

Roth while they can.

With a Roth there's no upfront tax deduction on money that is contributed but, ahem, your kid isn't yet in a high tax bracket, so that's irrelevant. The payoff is that after growing tax-free for decades, your adult child can pull out every penny from the Roth in retirement without a tax bill.

There's an income limit on who can contribute to Roth IRAs. In 2019, an individual with modified gross income below $122,000 and a married couple with income below $193,000 can make a full contribution of up to $6,000. (That's per person for married couples.) Those are pretty generous limits. But an early start - when your kid has yet to hit peak earnings - will make it likely they can get in at least a few years of Roth savings before they hit their mogul stride. (Even then, be sure to gently suggest they check out if their company offers a Roth option in the 401(k) plan. Most do. And there is no income limit. In 2019, anyone under age 50 can contribute $19,000 to a 401(k)).

The major discount brokerages will help you - and your kid - get rolling. If your child is a minor, you will open a custodial account with you as the owner and your child as the beneficiary. Once they turn 18 or 21 - depends on your state - it's all theirs. And no worries: Retirement accounts don't get factored into college financial aid eligibility.


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