Dear Liz: Our 16 year old daughter has been frugal since she started to understand money around the age of 6. She works and earns a decent income for a high school student. Its savings are now quite substantial. She wants to open a Roth IRA when she is young and has no tax liability. My wife and I have pensions and substantial savings, but only one IRA. So we have no idea how to help him open a Roth. What should she do? She has enough money to maximize her contributions each year in high school and college and wants to take full advantage of 50 years of tax-free growth.
Reply: Contribute to a Roth IRA is a great way for young people to build wealth, and the sooner they can get started the better.
Traditional IRAs generally offer a tax deduction for contributions, but withdrawals are taxable. Roth IRAs, on the other hand, do not offer an initial tax deduction, but withdrawals are tax exempt upon retirement. Opting for a Roth over a traditional IRA makes sense when you expect your tax rate to be the same or higher in retirement.
A contribution of $ 6,000 at age 26 can reach about $ 105,000 at retirement age, assuming an average annual return of 7%. (It’s a reasonable average for an investment over several decades in a diversified equity portfolio.)
Make the same contribution at age 16, and the money could grow to over $ 210,000 at age 67. The additional 10 years of compound earnings effectively double the total.
To contribute to an IRA or Roth IRA, people must have earned income such as a salary, wages, or self-employment income.
They are allowed to contribute 100% of their earnings in the tax year or $ 6,000, whichever is less. (People 50 and over can make an additional catch-up contribution of $ 1,000.) If your daughter made $ 4,000 this year, for example, that’s the most she could contribute to a Roth for 2021.
Your daughter usually can’t open her own account until she is 18, so you’ll need to find a brokerage that offers Roth IRAs on custody. She would be the account holder and you would be the custodian until she turns 18. Fidelity, Schwab, and Vanguard are among the discount brokers that offer Roth IRAs for safekeeping without requiring minimum investments or maintenance fees.
Sending checks in the mail is a really bad idea
Dear Liz: I do not agree with your opinion that electronic payments are much more secure than sending checks in the mail. My own personal experience of sending checks for about 40 years with a single incident (not attributable to the USPS) gives me great confidence in the courier as a payment system. In contrast, not a month goes by without the news of a large organization that has been entrusted with all kinds of personal and financial information breached in a cyberattack. If the bad guys get my credit card information I’m not over $ 50. I’m also not going to risk them having my bank account and routing numbers for the dubious convenience of saving a stamp. Yes, mailboxes are broken into, but until there are real penalties for inadequate IT security, businesses will continue to underfund their network security and be reactive rather than proactive. I will try my luck with the local thieves and not with the global population of black hat hackers.
Reply: You are absolutely right that the databases in which information is stored can be vulnerable to hackers if companies do not take the necessary precautions. But avoiding electronic payments does not prevent your information from ending up in these databases. Information about you is collected and stored whether you want it or not. You haven’t given your Social Security number, date of birth, and credit account details to Equifax, for example, but there’s a good chance you’re one of the 147 million Americans whose information were revealed when this credit bureau was breached.
Unlike some databases, electronic payment transactions have strong encryption which makes it extremely difficult for hackers to intercept and read information. Criminals are far more interested in targeting information that is at rest in databases than trying to capture and decode it in transit.
Your checks almost certainly get converted to electronic transactions, anyway. Few checks are physically passed between banks these days. Often times, a biller will take the routing and account numbers printed on your check and use them to request an electronic funds transfer through a clearinghouse such as the Automated Clearing House (ACH).
Since these numbers are printed on every check you send out, by the way, anyone who sees this piece of paper, whether it’s a mail thief or someone entering payment into their computer system. ‘a business could abuse this information. This is a much greater risk than the possibility of an electronic payment being hacked in transit.
Liz Weston, Certified Financial Planner, is a Personal Finance Columnist for NerdWallet. Questions can be directed to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.