Having a summer job is a big deal for kids. Not only does it teach them work ethic and responsibility but it also gives kids a chance to make their own money and not rely so heavily on mom and dad for money.
It is important to let your children spend some of their earnings. We like to recommend that they divide into three piles. One for spending, one for saving and one for sharing (giving to a charity of their choice). When it comes to the savings part, there are a variety of options available to them. Find the right type of account for your child and make sure they are happy with their choice. Here are some smart ways to save their summer savings:
- Savings Account. The maintenance fees are typically low in this type of account and they offer accessibility. This means that the money in this account is liquid and accessible.
- Roth IRA. While certain income restrictions do exist, you can generally contribute up to $5,500 per year. Then when it comes time to withdraw your funds, you will not have to pay taxes on your contributions and as long as you wait until you are 59 ½ and have owned the account for at least 5 years, you won’t have to pay taxes on your earnings either.
- Certificate of Deposit. If your kids won’t need these funds for a few months or even years, a CD could be a great option. Financial institutions pay you a higher interest rate than you would earn with a checking account or money market account, simply for leaving your money alone throughout the term.
- Money Market Account. This could allow you to earn a more competitive return than those offered by a savings account. There is often a minimum balance required for this type of account.
- 529 Plans. This plan can help make college expenses more manageable. If these funds are withdrawn for qualified college expenses, earnings are not subject to federal tax and usually state tax as well. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.
- Education IRA. This plan you are able to put money into each year until your child is 18 years old. The money must be used for higher education expenses.
We highly recommend bringing your kids along with you to meet with your financial advisor. It is great for them to learn how saving and investing works. To schedule a time to meet with a member of the Prosperwell team, please contact us at 763-231-9510.