Helping Kids Start Saving Early

May 20, 2021
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Ask just about anyone about their financial planning and what they would have done differently, and they’ll answer “I wish I would have started saving sooner”. As parents we’re in a position of being able to keep our kids from having that same regret.

Saving money teaches kids discipline, perseverance, the impact of small habits, and the power of compounding.

If a child had $6000 and invested it at age 16 (at 5% growth per year), it would grow to over $50,000 at age 60. If they would add 6000 per year every year over that same period of time, they would have $958,000 at age 60. Imagine if that was invested in a Roth IRA and the growth was tax free!

Sounds great, but the first hurdle is that when kids are 16, they often don’t have $6000.

There are several ways parents can help:

If you own a dental practice (any business) you can employ your children, even before age 16. A job in your dental practice can teach them a work ethic, offer work experience, and provide income that will make kids eligible for making a Roth IRA contribution. This can be a great way for younger kids to earn some money.

Typical jobs when hiring your children in your practice include routine office work, making deliveries or answering phones, maybe even confirming appointments. Many tech-savvy teens are adept at building or running a website, updating social media or maintaining spreadsheets.

Whether they work for you or get a more conventional teenaged after-school or summer job with a W2, they can contribute up to 100% of their earnings to a Roth IRA, up to the maximum ($6000 in 2021). If they would rather spend that money than save it, the money to fund the IRA can come from forward-looking parents (or grandparents), as long as the contribution limits are recognized.

Can you pay kids for household chores and put the money into a Roth IRA?

Kids can contribute to a Roth as long as they have earned income. That can be as an independent contractor working for you and reporting the income on schedule C and paying self-employment taxes, or as “household help” where you pay Social Security, Medicare, etc.

There are some age restrictions on what kids can legally do for money (age-appropriate, shouldn’t be potentially hazardous either to the worker or the recipient of the person served), but you weren’t going to risk your kids anyway, were you?

Helping your kids start saving early is an incredible gift that will keep on giving. Ron Lieber, author of “The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money” says “every conversation about money is also about values.” This isn’t just about saving; the values that come from learning to save include the importance of having a long-term purpose, the value of setting aside a portion of your earnings and the rewards of delayed gratification – great lessons at any age.

You can’t turn back the clock for your own savings, but you can start your kids early and give them an incredible head start. Call us to talk about how to set this up.