Recently, one of my long-time friends and client called me to schedule a meeting with him and his two children. They are in their early twenties and working. They had received stimulus checks and as they didn’t need the money to live on, the father thought they could use it to begin investing in their futures.
Were they making $6,000 or more annually? If not, we’d need to open an individual account, but as they both were, they would qualify to put those dollars into a Roth IRA. As the stimulus checks are not taxable, and contributions to a Roth IRA are in after-tax dollars, it presented a win-win scenario for the young investors. Tax-free money in, then tax-free out, including earnings over the years, when withdrawn in retirement.
Beyond opening the accounts, the stimulus checks introduced these young adults to systematic investing. They will add to their Roth IRAs via regular automatic after-tax draws from their checking or savings accounts, which will increase as their earnings grow to $6,000 a year—$7,000 a year after age 50. If they need to access the money along the way, before the age of 59.5, they can withdraw up to the amount they have contributed to avoid being taxed on the earnings and paying a 10 percent penalty (provided it is after the 5 year waiting period).
The stimulus checks also gave us an opportunity for a stimulating conversation about investing. Their father was pleased to use the event not only to expose them at an early age to investing, but to educate them on various types of investments, in particular the distinctions between equities, or stocks, and fixed-income investments like bonds.
If you’re considering opening a Roth IRA, you can still beat the extended deadline for 2020 contributions. Like the federal income tax filing deadline, the deadline to open or contribute to a 2020 Roth IRA has been extended to from April 15 to May 17, 2021.
For more information about Roth IRAs or to talk with an HBKS advisor, call 866-536-5776.