Investors may be excited to learn that annual contribution limits to IRAs increased this year for the first time since 2013. Last fall, the IRS announced that beginning in 2019, the annual contribution limit to IRAs would increase to the lesser of one’s earned income for the year or $6,000 ($7,000 for individuals age 50 or older.) – up from $5,500 in previous years.
For those unfamiliar with the term, an IRA (Individual Retirement Account) offers different tax advantages depending on whether you invest with a Traditional IRA (which allows you to deduct the contributions you make from your taxable income, but taxes the withdrawals you receive in retirement) or a Roth IRA (which does not allow a tax deduction on your contributions but allows tax-free withdrawals once you turn 59 ½ years of age.)
Both types of IRAs offer some great tax advantages, but what you might not have considered is that IRAs also offer you a great opportunity to begin teaching your children or grandchildren the value of saving and investing their money at an early age. For example, if your children or grandchildren have summer jobs, you could write a check to their Roth IRAs for the amount of income they earned during the summer (keeping in mind the maximum contribution limit of $6,000 per year.) This would allow the amount inside their Roth IRA to grow tax-free.
If your children or grandchildren question why they can’t simply have the money now, show them how to use an investment calculator and explain to them how much their investments might be worth if they wait to make withdrawals until age 59 ½ – when there are no penalties for making withdrawals.
For example, if you make a $6,000 contribution to your child or grandchild’s Roth IRA when he or she is 16 and he or she waits until age 60 to make a withdrawal, that $6,000 investment could be worth more than $64,000, assuming the annual rate of return averages 6%. If you make an additional contribution of $50 each month (assuming earned income allows this), that amount could more than double to $191,000. Consider implementing a matching program where you match your child or grandchild’s contributions, up to a certain amount. They are much more likely to get excited about investing if they can see for themselves how investing a little more each month can result in a significantly larger investment later on in life.
Finally, if you are concerned about possible gift tax consequences, know that the annual exclusion for gift tax purposes increased this year as well. Individuals can now gift up to $15,000 per person ($30,000 for a couple). With this information in mind, consider spending some time (and money) in order to teach your children and grandchildren the value of investing.