Here’s how to incentivize your child to invest for retirement – NBC 6 South Florida

• Once you’ve decided to open a Roth individual retirement account for your child, it’s time to convince them to save their hard-earned money.
• Use this opportunity to explain how compound interest works and show them how even small amounts can grow over time.
• Offering a “parent match” program can be a useful incentive.

Once you’ve decided that opening a Roth individual retirement account for your child is a good idea, now comes the hard part: convincing the child to save for a future retirement instead of spending their hard-earned money.

I have some ideas for how you can convey this to your child.

It’s also important to consider what counts as “earned income” for a child’s Roth IRA.

Here’s how to get your child to save for retirement

Getting your children to save can help set them up for long-term financial success. Here are some ways to do this:

• Start a “parent match” program where they contribute some extra money, such as an additional $5 for every $10 of earnings they put into the Roth IRA. Offer concrete rewards for each savings goal achieved; Charts and apps can help you keep track. Set up a “savings challenge” where everyone tries to save a certain amount each month; Whoever saves the most or achieves their goal receives a reward.

• Encourage them to round up all purchases to the nearest dollar and save the difference. For example, if something costs $4.50, they save the remaining 50 cents. Offer to pay your child interest on the money they save. You can set a small percentage, such as 5%, to be added to savings monthly or quarterly. This teaches them how to make money from savings through compound interest.

• Motivate your child to take on extra tasks or small tasks such as babysitting, helping out in the neighborhood or tutoring. Then encourage them to save a portion of their earnings by offering a bonus if they save a certain percentage. If they start a small business, such as selling crafts on Facebook Marketplace or Etsy, suggest they save a portion of their profits and offer to match those savings.

• Celebrate important savings milestones, like saving your first $100, with a small reward, whether it’s a favorite food, a day trip, or a new book or game. Acknowledge your savings successes in front of family or friends to reinforce positive behavior.

Plea for saving and investing

Use this opportunity to explain how compound interest works and show them how even small amounts can grow over time. If your child wants to spend money on a particular item, require them to save the same amount before allowing them to purchase it.

For example, if they want to buy a toy that costs $30, they must first save $60, half for savings and half for the toy. This strategy encourages them to think about balancing saving with spending. Instead of financial rewards, offer privileges to save money—like more screen time, a later bedtime, or a special outing.

This can make the idea of ​​saving more attractive, especially for younger children. As a reward for consistent savings, offer more independence, such as managing a small portion of the household budget.

Teach financial literacy and lead by example. Let your children help you choose their Roth IRA investments. Seeing how your money can grow through smart investing can be a powerful incentive. Start a family investment club where everyone picks stocks or other investments. Offer a small prize to the person whose investment performs best over a certain period of time.

Discuss your own savings goals and successes with your child regularly. If they see that you are prioritizing saving, they are more likely to do the same.

Work together on a family savings goal, such as a vacation, and let them see how their contributions will help reach the goal faster.

Encouraging your child to save is about making saving worthwhile and fun. These strategies can help your child develop strong financial habits that will benefit them throughout their life.

Ways to Make Money on Roth IRA Contributions

To contribute to a Roth IRA for children, the child must have income. This income can come from traditional employment, such as part-time work, or from self-employment, such as babysitting or mowing lawns.

The maximum annual contribution for 2024 is $7,000 or the sum of the child’s earned income for the year, whichever is less. If a generous parent or other benefactor is willing, he or she may allow the child to keep some or all of their earned income and fund the Roth, as long as their contribution is not more than what the child earned.

What counts as earned income for a Roth IRA? Earned income is money you receive from work or services rendered. It’s important to understand what qualifies to ensure your child’s contributions comply with IRS rules:

Wages and salaries:

• Paid internships: These days, most colleges have on-site internship offices that can help you find a paid internship. This provides the opportunity to earn an income while developing skills and building networking relationships for your future career goals.
• Part-time jobs: Earnings from part-time employment, such as working at a grocery store, fast food restaurant, or retail store, are considered earned income. For example, if a 16-year-old works at a coffee shop and earns $4,000 over the summer, that $4,000 is considered earned income.
• Formal employment: Income from formal employment where the child receives a W-2 form is the simplest type of countable income. This includes hourly wages, salaries and tips.

Income from self-employment:

• Babysitting: Money you earn from babysitting jobs is considered self-employment income. For example, if your teen earns $1,500 from babysitting throughout the year, that amount can be used for Roth IRA contributions. The same goes for lawn or garden work in the neighborhood.
• Tutoring: My son has already done a few of these. Tutoring for other students is also qualified, be it in person or online.
• Arts and crafts sale: If your child sells homemade crafts or art at local fairs or online and earns income from those sales, this is considered earned income.
• Jobs in the gig economy: Income from online platforms where a minor provides services such as graphic design, writing or coding is considered earned income.
• Delivery orders: Earnings from food delivery, age restrictions permitting, through services like DoorDash or Uber Eats also count as income.

What is not considered earned income: Money received from parents for household chores or as an allowance does not count, nor do cash gifts or investment income, as well as scholarships and grants. This last category is considered nontaxable income and therefore cannot be used for Roth IRA contributions.

– By Winnie Sun, co-founder and managing director of Sun Group Wealth Partners based in Irvine, California. She is also a member of the CNBC Financial Advisor Council.