Minneapolis / St. Paul Business Journal Leadership Trust: This year’s best gift idea? Helping your child’s first job contribute to their retirement fund

While some teens excitedly await getting their first job, others dread it, as the minimum wage they earn does not stretch very far considering the amount of time they put in. While it’s difficult to make enough at a first job to pay for daily expenses, let alone contributions toward college or retirement, there is a way for parents to assist that can lead to a substantial retirement savings account.

Most first jobs, especially minimum wage jobs for high school students, will not come with any form of benefits, let alone retirement benefits. However, this does not mean that your child cannot start contributing toward retirement at an early age, which is highly beneficial as these funds will compound over half a century or more.

MAGI and Roth IRAs

In order to contribute to a retirement account, an individual must first have an earned income from a job. The second criterion is the modified adjusted gross income (MAGI) of the working individual. Since your child has just started their first job, their MAGI is likely going to be low — perhaps the lowest it will ever be in their life. This provides a great opportunity to capitalize on their being in a low income tax bracket by contributing after-tax dollars into a Roth IRA. The reason to choose a Roth over a traditional IRA is that your child is likely in a lower tax bracket than they will be when they start pulling funds out of the account in retirement, thus making it more beneficial to pay taxes on the contributions now versus deferring the tax until retirement. As long as your child has a MAGI of less than $129,000 in 2022, then you as a parent can come in to assist.

Why matching contributions are the best gift idea

Reading up to this point, you may be thinking, “This is all great, but my child uses their earnings to pay for gas, going out with their friends, and maybe saving some for college; they don’t earn enough to even start thinking about saving for retirement.” Well, this is where the best gift idea of the year comes into play. While it may be true that your child needs to use all their earnings for their daily expenses, since they are earning an income, they do qualify to contribute to a Roth IRA. You can encourage this by matching your child’s Roth IRA contributions dollar for dollar, helping them start their journey toward multimillion-dollar retirement savings.

One important tip to keep in mind if you want to proceed with this idea is to ensure that you only match your child’s contributions toward retirement savings. Retirement contributions are limited based on earnings, with the maximum being $6,000. If your child earns $1,000 this year, they can contribute $1,000 into their Roth IRA; if they earn $8,000, they can contribute $6,000. It’s also important to remember that technically, you will be gifting your child funds toward their living expenses, because an individual cannot contribute into another individual’s IRA account on their behalf.

Final thoughts

Matching earned income to assist your child with retirement contributions is a great way to motivate them as they embark on their employment journey and give them a head start on saving for retirement. With the holidays right around the corner, consider giving your child the gift of future financial freedom through Roth IRA contributions that will compound over half a century or more.

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