How to Engage Your Kids in Planning Early for Their Retirement

You probably remember some of your first ideas around money forming at a young age. 

Did you learn any money lessons from those early years of your life? If so, they likely came from your parents or guardians. Maybe you saw them budgeting every week or shopping with coupons at the grocery store. Maybe they gave you an allowance for completing some chores around the house. 

Those early lessons likely had a big impact on the way you grew to think about money, whether you realized it or not. In fact, one study found that kids form habits around money by the time they’re seven years old. 

Regardless of the lessons you learned early on, you now have the opportunity to teach your kids about money. Teaching them the basics — as well as about more complex topics, like investing — will go a long way in helping them develop good habits early in life. Not only that, but you can help your kids get a head start on their retirement savings. 

With time on their side, it’s never too early — or too late — to encourage your kids to start investing in their future. Below, we dive into why it’s so important and how you can get started.

Why You Should Teach Your Kids About Money Now

Regardless of when you started saving for retirement, you probably wish you’d started sooner. Maybe you’re already on track to surpass your retirement goals, and that’s fantastic. But it’s no secret that if you’d started earlier, it could have been easier to get where you are today — thanks to compound interest.

Compound interest is a powerful tool, and time is the magic ingredient that makes it work. Fortunately for your kids, that’s exactly what they have. 

No matter the age of your kids, now is the perfect time to start talking to them about saving and investing. And once they’re old enough, you can introduce the concept of compound interest. 

Play around with a compound interest calculator and share this tool with your kids. This can help them see just how much their money can grow over the years and will incentivize them to start investing now. 

How To Teach Kids About Money and Retirement

All kids have different learning styles, so there’s no one way to teach your kids about money. Plus, the level of involvement and understanding you can realistically expect depends on your child’s age. 

Start introducing these concepts to your kids as soon as they’re ready. Include them in your conversations about money. And — perhaps most importantly — model good financial habits.

By taking these steps, your kids are more likely to develop an interest in money — and they may be excited to learn more. Here are some ways to start teaching your kids about money and encourage them to start saving for their retirement.

Ask questions to learn about their interests in investing

One of the best ways to engage your child in planning for their own retirement is to make it fun for them. With all of the new vocabulary around investing — not to mention practicing the ultimate delay in gratification — kids might get bored. 

To keep them engaged, learn what interests them. For example, you could ask: “If I gave you $1,000, what would you invest in? Why?”

Knowing what interests your child can help you encourage more engagement in that area. For example, maybe they’re interested in a company that creates their favorite video game, and they want to buy stock in the company. Or maybe they’re curious about real estate, and you can provide resources to help them learn more about it. Each of their interests can easily become a learning opportunity — and maybe even an investment opportunity. 

Help them determine how much to contribute

In 2022, the contribution limit for an IRA is $6,000 for those under the age of 50. However, if your child earns less than $6,000 in one year, they can only contribute up to the amount that they earn. 

Other people can contribute to your child’s IRA, as long as these contributions don’t exceed your child’s earned income.

Once you’ve helped your child open an investment account, you can encourage them to get in the habit of contributing to it each month. Some parents might even like the idea of matching their child’s contributions to further incentivize them to save.

While the maximum contribution might be out of reach for a lot of kids, smaller contributions make a big difference. Help your child set a target for their monthly contribution based on how much they earn and other saving and spending goals. With a compound interest calculator, you can help them see that a little money today can grow quite a bit over the years. 

Teach them about different retirement accounts

There’s a lot of jargon when it comes to the financial industry, even within the topic of retirement. Start by helping them learn about different types of IRAs and the advantages of each. 

Traditional IRA

A traditional IRA is a type of tax-advantaged retirement account. Pre-tax income grows tax-free, but you pay tax when you withdraw it in retirement. You can open a custodial IRA for your child while they’re a minor, and when they reach the age of the majority, the account belongs to them.

Your child must earn income to have an IRA. A part-time job, lawn-mowing business, and babysitting all count as earned income — but allowance and cash gifts don’t. 

Roth IRA

A Roth IRA is similar to a traditional IRA but differs in terms of when you get the tax advantage. Instead of funding a Roth IRA with pre-tax dollars, you contribute after-tax dollars that grow tax-free. When you withdraw money from a Roth IRA, you don’t have to pay income tax on those withdrawals. 

Roth IRAs (as opposed to traditional IRAs) are usually a better choice for kids. This is because they’ll be in a higher tax bracket when they retire, and unlike with a traditional IRA, they won’t have to pay those higher taxes when they make a withdrawal in retirement. 

Just as with a traditional IRA, you can open a custodial account, in which you control the assets until your child reaches the age of majority. Like a traditional IRA, your child needs earned income to have a Roth IRA. 

Self-directed IRA 

A self-directed IRA lets you invest in nontraditional assets while enjoying the tax benefits of a regular IRA. 

There are both traditional and Roth self-directed IRAs, each with the same contribution limits as regular IRAs. As mentioned above, a Roth self-directed IRA makes the most sense for kids because the tax advantages outweigh those of a traditional IRA. 

Unlike regular IRAs, you have to open a self-directed IRA with a custodian. While they don’t invest for you, custodians help you make transactions and ensure you’re following the IRS regulations. 

Help them understand their investment options

After you’ve helped your child open an investment account — and after they’ve made a habit to contribute to it — you can talk about their investment options. 

When it comes to investments, you’ll want to help your child understand what’s what. Obviously, there are a lot of options out there. You can start by explaining the most common types of investments — like bonds, money market accounts, mutual funds, ETFs, and stocks. 

Of course, with a self-directed IRA, investment options expand to include nontraditional assets, like real estate, private equity, cryptocurrency, precious metals, and so much more.

How Chicago Trust Administration Services Can Help

At Chicago Trust Administration Services, we want to help you engage your kids in saving for their future retirement. They don’t have to wait until they’re several years into their career — they can start right now. 

As a custodian for self-directed IRAs, we help individuals invest in nontraditional asset classes — no matter how far they are from retirement.  

To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.