Invest to show your teen the power of compounding

If your teenager is getting ready to land a summer job, it’s a good opportunity to teach him or her about saving money and then using that nest egg as a lesson about the power of compounding.

One possibility is to start a custodial Roth Individual Retirement Account, owned by your teen. All you need is a custodial account with an adult co-signing if the teen is under 18. That money can grow for many decades and come out tax-free 30 or 50 years down the road.

How much are we talking about? If the money were to grow at an average rate of 5 percent a year – which is not guaranteed, but is in line with long-term averages for a balanced portfolio – then a $5,000 contribution at age 19 would grow to $52,006 by age 67. If your child waits until age 25 to invest the same amount in a Roth IRA, under the same return assumptions, the balance at age 67 would be just $38,808.

If that contribution becomes a habit, the numbers become more interesting. A 19-year-old who maxes out on a $5,500 Roth contribution every year until age 67, under the same rate of return assumptions, would see the account grow to $1,164,985.

Suppose your teen decides to spend some of that money or use it for college tuition? Parents and/or grandparents can match whatever contribution the child decides to make, to bring the total back up to $5,500. The money in a Roth or other retirement account doesn’t count toward the Fafsa financial aid form, so you don’t have to worry about compromising the teen’s financial aid eligibility. And having a hefty Roth IRA at retirement might address the possibility that Social Security won’t be around, or as robust, when your kids eventually retire.

For more information on how to get started, contact one of our advisors.

Important Disclosures
*Past performance is not an indicator of future results. This material is not financial advice or an offer to sell any product. The statements contained herein are solely based upon the opinions of Elevage Partners, LLC (“Elevage”). Elevage is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which may be requested by calling (877) 922-8243 or visiting www.adviserinfo.sec.gov. The information contained herein is derived from sources we believe to be reliable, but which we have not independently verified. Elevage assumes no responsibility for errors, inaccuracies or omissions in this information. Elevage reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive. It should not be assumed that any of the securities transactions, holdings or sectors discussed were, or will prove to be profitable, or that the investment recommendations or decisions Elevage makes in the future will be profitable or will equal the investment performance of the securities discussed herein.
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