By Eric Reich
’Tis the season for graduation. It’s amazing to see all of my friends’ kids growing up (and yet, amazingly, I’m not getting any older). For me, it’s hard to believe my middle child will be heading off to high school. Now is the perfect time for those grads, be it eighth grade, high school, or college, to start off right by getting into the habit of investing.
All of my kids have investment accounts and are required to save 30% of everything they make. While this might be hard to maintain once they get out into the “real world”, they will have at the very least developed the habit of investing a percentage of their income for the future. It’s important that your kids or grandkids realize the power of compound interest and what investments can do for them in the future. I try to explain to my kids that the goal should be to save enough money that you could stop working and still make just as much income from your investments (or more) than you did while you were still working. That is the definition of financial freedom.
Let’s look at a few of the options available to young people today to start to save for the future.
- Roth and traditional IRAs
Kids with earned income can contribute up to 100% of that income up to a limit of $7,000 for 2024 to either a traditional or a Roth IRA, or a combination of both, but the total can’t exceed $7,000. My kids all use Roth IRAs. The difference is that a traditional IRA gives you a tax deduction in the year of contribution, but you pay taxes on it when you take it out (and a 10% penalty if you take it out before age 59 ½). A Roth contribution does not give you a tax deduction, but when you take the money out in retirement (after age 59 ½ and 5 years of total ownership) all of the withdrawals are tax-free. I love Roth IRAs for young people for this reason. In addition, once you turn 50 you can add another $1,000 per year too.
- 401(k)/Roth 401(k)
Allowable contributions to a 401(k) are much larger than an IRA or Roth IRA. For 2024, you can contribute up to $23,000 (if your plan allows a contribution percentage high enough) or $30,500 over age 50. I recommend new college grads start out at 10% and increase that amount by 1% each year until they get to 20%. Add in a possible company match, and your money can add up really quickly. Again, for younger ages or those in a lower tax bracket, a Roth 401(k) is likely the way to go. Yes, you are giving up a current tax deduction. However, chances are it doesn’t amount to much anyway, certainly not compared to a potentially large future balance. If your company matches your 401(k), that match amount will always be to the traditional account and not the Roth, even if all of your contributions go into the Roth.
- Brokerage Account
Lastly, any excess funds that they might need to access prior to age 59 ½ can simply be invested into a regular brokerage account that they can access any time they need. My kids use these too. Even small deposits from birthdays, etc. can add up really quickly.
The important thing is to start right now. Do not wait to get into the investing habit or you will likely never do it. Even if you do, you won’t be able to accumulate nearly as much as if you had started earlier. It’s never too early to learn something. The habit of investing is probably one of the best things you’ll ever learn in your life.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
