My Child Works a Low-Paying Job. Is ‘This a Great Time’ for Them to Max Out a Roth IRA?

Ask a counselor: My child works a low-paid job.  Is It a Good Time to Max Out a Roth IRA?

Ask a counselor: My child works a low-paid job. Is It a Good Time to Max Out a Roth IRA?

My child is in a low-paying job, which puts them in the 0% or maybe 10% marginal tax bracket. Isn’t this a great time to max out a $6,000 Roth IRA contribution? We are considering a gift to partially or fully offset their contribution. Am I missing something?

– Marshall

You don’t seem to be missing anything.

If your child (or you) has the means to contribute something to his or her retirement savings, I generally recommend a Roth Individual Retirement Account (IRA) as the vehicle to do so.

Maximizing it is great, but certainly not necessary. That said, there are always exceptions, and I can think of one or two situations where a Roth isn’t appropriate. These are also specific, but let’s take a look at them just in case. (And if you have questions about your personal financial situation, consider working with a financial advisor.)

2 Reasons Your Children’s Fund Can’t Be a Roth IRA

Ask a counselor: My child works a low-paid job.  Is It a Good Time to Max Out a Roth IRA?

Ask a counselor: My child works a low-paid job. Is It a Good Time to Max Out a Roth IRA?

In general, there are a few reasons why your child may not choose to fund a Roth IRA — or max out.

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Taxes. A big reason to choose a retirement savings vehicle over a Roth is if someone expects to be in a lower tax bracket in the future. It doesn’t seem to apply in your child’s case, but I’ll revisit that later.

College financial aid. The most likely reason your child may not want a Roth is if they are applying for college financial aid through the Free Application for Federal Student Aid (FAFSA). The FAFSA-based awards calculator ranks college financial aid according to your family’s financial need.

Low-income students and parents are generally given more aid than their higher-income counterparts. Parental income affects financial aid amounts, but student income has the greatest impact.

In order to maximize the financial aid awarded for the 2022-2023 school year, an applicant’s income must be less than $7,000. So, in the interest of staying as close to that limit as possible, you may want to start your child off with pre-tax contributions from a traditional IRA. The same logic applies to any other situation where they are required to reduce their reportable income.

Other than that, I struggle to think of good reasons for young people not to save in a Roth.

Why you should consider a Roth for your child

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Ask a counselor: My child works a low-paid job.  Is It a Good Time to Max Out a Roth IRA?

Ask a counselor: My child works a low-paid job. Is It a Good Time to Max Out a Roth IRA?

Roth IRAs are suitable for:

  1. Still far from retirement.

  2. Expect to be in a higher tax bracket after retirement than they are currently.

Both are almost certainly true of low-income recent graduates, for example. So what your child can scrape together — even if they’re only waiting tables and spending most of their paycheck on a downtown studio apartment — is worth putting into a Roth.

For one thing, their long time horizon means that even a small major can make substantial income after they retire. For another, their after-tax contributions will create substantial savings over the total life of the account, assuming they retire in a higher income bracket than they are now. That is a reasonable assumption to make.

I’ll also point out how the original question referred to a parent’s gift to offset the child’s contribution. It’s a great strategy if you can handle it. Since Roth contributions can’t exceed the account holder’s earned income (and they’re the only ones who can make the contributions in the first place), the IRS doesn’t care if mom and dad pitch in to ease any pressure on his or her living expenses.

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The bottom line

In short: there are times when other investment vehicles are better, I’d say, more often than not, the Roth is a fantastic choice for young savers to get off to a good start. And if they have parents who are capable and willing to chip in a little, so much the better.

Graham Miller, CFP® is a SmartAsset financial planning columnist and answers readers’ questions on personal finance topics. Have a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Graham is not a participant in the Smart Advisor Match platform.

Tips for Managing Retirement Accounts

  • People who work with a financial advisor are twice as likely to meet their retirement goals, industry experts say. SmartAsset’s free tool matches you with up to three financial advisors serving your area. You can meet with your advisor at no cost to determine which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • Another easy way to save for retirement is by taking advantage of an employer 401(k) match. SmartAsset’s 401(k) calculator helps you figure out how much money you’ll have based on your annual contribution and your employer’s matches.

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