Thoughts on a Roth for 16 y/o?

[rooster222]

Our dd just got her first job and is completely on board with socking away some of her paycheck.

I've read that having a Roth could interfere with financial aid for college but I'm pretty sure we won't qualify anyhow and she's already thinking about less expensive state schools.

She was gifted a handful of savings bonds as a baby but they won't mature for 15 more years. We were thinking about cashing those out to start the Roth. I'm not sure how much they are worth, maybe $300, nothing substantial. Seems like the Roth could do more to grow them but I'm no aficionado on savings bonds.

Any input? Good plan?

[tcu2003]

Retirement assets aren’t counted against you for college financial aid, so as long as you won’t need the money, putting it in a Roth would be a good move and help your daughter get started at a young age for retirement savings.


thecollegeinvestor.com/21215/roth-ira-paying-tuition/#tab-con-6


If you can afford to match what she saves, I would personally do that as incentive for her to save.

[Poppy]

It seems like a great thing to start. FYI, contributions cannot exceed earnings. You will want to investigate investment options. Some have minimum investments. Years ago, STAR fund from Vanguard was a great balanced option with a lower minimum investment, but I don't know if things have changed with that.

[Wallflower]

I think it's a *great* idea to get your DD started on the path towards investments and saving for retirement! And teaching her about compounding - by the time she gets a real job and can consider a 401k, she'll already understand how a little can grow over time. (I know that was hard for me in my first job, so I put off contributing to my 401k for a few years. Critical years.)

Also, if you are willing, you can contribute to the Roth for her. As tcu2003 mentioned, total contributions can't exceed what your DD is earning, but the contributions can come from you or her. So if she isn't going to contribute the maximum, and you want to, you can make up the difference. (This is as far as I understand the rules, so you'll want to double-check this.)

Income from savings bonds is taxable, at least at the Federal level. State level may differ by state, but in NY it is not taxed. Just FYI for considering. Bonds are pretty low yield investments, especially now, so it isn't the worst idea to convert them to the Roth. I'd just consider the source of the bonds - for example, my mother is very old school and a firm believer in bonds. She might have her feelings hurt if she gifted a bond and I didn't let it mature.

[sandandsea]

If college is already saved for and paid for, including living expenses, then I think it’s a great idea. Also you need to think about things like a first car, cell phone, insurance and how she will pay for those items and when you are going to stop paying for them.

I worked through HS and saved it all in a regular savings account for college and it was very needed as I paid for my own college and took out student loans to make up the difference. I only had $22 K of SL debt after finishing grad school so it paid to save it all and have it assessable.

[awkwardpenguin]

This is a bit off topic, but if you have a 16 year old, you should definitely learn what your standing is for financial aid ASAP.

studentaid.gov/understand-aid/estimate

Some families are surprised that they qualify even with relatively high income.

If she does qualify for aid, student earnings above $6400 begin to affect aid. The Roth itself does not affect aid eligibility.

[dragon's breath]

Definitely get a Roth IRA started. If she makes a habit of saving 10 to 15% of her income for retirement, right off the top, she'll be far ahead of most people. Those early years of very little set aside will be worth much more than a lot put aside during later years. 10% usually isn't enough to make-or-break "life expenses" as long as needs are met. I really wish Roth IRAs had been around when I was 16!

[rooster222]

Aug 3, 2020 9:20:28 GMT -5 Wallflower said:

I think it's a *great* idea to get your DD started on the path towards investments and saving for retirement! And teaching her about compounding - by the time she gets a real job and can consider a 401k, she'll already understand how a little can grow over time. (I know that was hard for me in my first job, so I put off contributing to my 401k for a few years. Critical years.)

Also, if you are willing, you can contribute to the Roth for her. As tcu2003 mentioned, total contributions can't exceed what your DD is earning, but the contributions can come from you or her. So if she isn't going to contribute the maximum, and you want to, you can make up the difference. (This is as far as I understand the rules, so you'll want to double-check this.)

Income from savings bonds is taxable, at least at the Federal level. State level may differ by state, but in NY it is not taxed. Just FYI for considering. Bonds are pretty low yield investments, especially now, so it isn't the worst idea to convert them to the Roth. I'd just consider the source of the bonds - for example, my mother is very old school and a firm believer in bonds. She might have her feelings hurt if she gifted a bond and I didn't let it mature.

The bonds are from my aunt & uncle and we haven't spoken in 3 years. I'm assuming there is no way they'd know we cashed them out. I think my name is the only other name besides my daughter's name on them.

[rooster222]

Aug 3, 2020 12:58:35 GMT -5 awkwardpenguin said:

This is a bit off topic, but if you have a 16 year old, you should definitely learn what your standing is for financial aid ASAP.

studentaid.gov/understand-aid/estimate

Some families are surprised that they qualify even with relatively high income.

If she does qualify for aid, student earnings above $6400 begin to affect aid. The Roth itself does not affect aid eligibility.

Thanks for the resource. I put in our info and it basically said we would be eligible for a loan and student work/study. We went to a college info session last year and they said to fill out FAFSA even if you don't think you will get anything so we do still plan to do it.

[ssmjlm]

You can go online and see the status of the bonds and their interest rate.

DH and I still have five figures in savings bonds and some of them are making bank in interest. But they're from the 90s. I won't cash them out until they've hit max maturity. You will get a tax form from the bank for cashing them out.

[Susie]

rooster222, you can check the interest rate, value, maturity date, and other info on the bonds here:  www.treasurydirect.gov/indiv/tools/tools_savingsbondcalc.htm#Worth  

H had a bunch that were given to him as a kid "for college" but it has always struck me as such a bizarre way to save "for college" considering he's >40 now and some of them still aren't mature.  Since most of his are at 4%, we've used other cash to pay down SLs, and kept these as part of our e-fund, since they're earning about +3% right now compared to our e-fund.  As they mature and stop earning interest, we cash them in and add them to our e-fund account.  I kind of can't wait to be done with that whole process, it's annoying tracking them, hanging onto the paper, etc.  It's so old school.  For now I can't really justify cashing in early though.  

I'm guessing the interest rate on the ones you have are <4% and you probably would do better with the money in a Roth.  Way back when I first opened a Roth, $1k was the min for the Vanguard STAR fund.  I think target date funds had $5k minimums.  But it's certainly worth looking into.

[Wallflower]

Aug 4, 2020 11:46:03 GMT -5 Susie said:

rooster222 , you can check the interest rate, value, maturity date, and other info on the bonds here:  www.treasurydirect.gov/indiv/tools/tools_savingsbondcalc.htm#Worth  

H had a bunch that were given to him as a kid "for college" but it has always struck me as such a bizarre way to save "for college" considering he's >40 now and some of them still aren't mature.  Since most of his are at 4%, we've used other cash to pay down SLs, and kept these as part of our e-fund, since they're earning about +3% right now compared to our e-fund.  As they mature and stop earning interest, we cash them in and add them to our e-fund account.  I kind of can't wait to be done with that whole process, it's annoying tracking them, hanging onto the paper, etc.  It's so old school.  For now I can't really justify cashing in early though.  

I'm guessing the interest rate on the ones you have are <4% and you probably would do better with the money in a Roth.  Way back when I first opened a Roth, $1k was the min for the Vanguard STAR fund.  I think target date funds had $5k minimums.  But it's certainly worth looking into.

OMG, yes. I totally feel your pain.

My mother laddered bonds for several years - every month, she'd buy 3 - all in her name with each of us kids as a second name (i.e., one for each kid). They've been coming due for the last few years, so every few months, I have to take her to the bank to deal with them because she doesn't drive any more. Sometimes, it's a trip to the safe deposit box first (different bank from where she cashes the bonds, because old person reasons). 

Thankfully, she doesn't like going monthly and I finally convinced her to store several months' worth at home, saving one part of the trip.

[sent]

I hired my 6 year old on my payroll to shred papers and do other small tasks this summer so I can open a ROTH for her in January. She's a terrible employee, rolls her eyes way more than I'd tolerate from the others LOL. I need to check out these links.