roth-ira – two chicks talking money.

The Sweetness of a ROTH IRA:

We all know we need to be putting money away for retirement. Most people just use their pension plan or their 401K plan at work. BUT if you are eligible for a ROTH IRA account, it’s worth having one! Does this make you a luck person? Well, I guess it depends on how you look at it. To be eligible, there are income limits. If you file single for tax year 2024, your modified adjustable gross income needs to be under $161,000. Filing married that modified adjustable gross income needs to be under $240,000. IF you gross more than those amounts… Well then, you’re LUCKY! 😊

The Max amount per year you can contribute in 2024, is $7,000 per person if you are under the age of 50. If you are over 50 years old the max per person is $8,000. Check out the link from Schwab for more details.

Roth IRA Contribution Limits | Charles Schwab | Charles Schwab

What so great about having a ROTH? Do we need one if we contribute to our 401k plans?

I would say yes! Here is why. As we get older and decide we are ready to start taking money out of our retirement accounts to live on, we DO have to pay taxes on this money if it comes from a 401K, 403b, traditional IRA. Really anything that is considered a PRE-TAX IRA. PRE-TAX means we have NOT paid any taxes on the money that got to hang out in those special accounts growing on compound interest. Uncle Sam wants his money! When we are retired, we still pay taxes on our income, for the most part anyway. Some states have some great tax breaks but let’s keep this conversation basic. Better to be pleasantly surprised at tax time in your retirement days, than surprised in a bad way.

A ROTH is money you put in an account that you have from a say, payroll check and instead of putting in in your savings account you put it in a ROTH IRA account. This account grows TAX FREE, with COMPOUND interest, and you NEVER pay a tax on it!!!! Did you get the word NEVER!!!! How SWEET is that! That’s our reward for not being high earners but let’s take the win here!!!

When it comes time to use any of our money in retirement it’s nice to have three buckets to pull from. This is where a tax accountant comes in handy. But let’s deal with that WHEN we/you get to that point, as those pesky tax laws change all the time.

Bottom line, IF you have money in say a 401K, and a ROTH, and Social Security, this could help you have 3 spots to pull money out of each month and keep the taxes pay much lower.

Seems like a good idea to me! You do not need to max out these accounts every year either to make an impact on your bottom line 20-30 years down the road. Think about it and get on a ROTH IRA calculator to see if that motivates you to take some action. This simple calculator from Bankrate is great! Roth IRA Calculator | Bankrate

If you do pull the trigger, or already have a ROTH, make sure the “assets are allocated” based on your risk tolerance, and don’t leave it in CASH. CASH does not grow. You got this!

Talking to our kids about money…

There is extensive evidence on how people’s emotions and feelings around money are shaped by the actions we see, hear, and feel pertaining to money when we are kids. Our fears, our habits and our anxiety around money usually comes from experiences we had as children. No pressure here on us parents! Like our job as parents is not hard enough! Ok so let’s break it down. Perhaps we need to put some rules in place like trying not to argue about money in front of the kids when they are young? Easier said then done…

When money is tight, it’s stressful, and the kid’s associate money with a tense situation and learn to “fear” money or think they just need more money and it will all be ok, right? As adults we know this is not always true. More money does not make all the problems go away, if the habits don’t change and we spend more than we make.

So how do we fix this? We know we need to slow our roll, create budgets, and cut back on the non-essential items… Ya, Ya, Ya…We all know what we NEED to do.

The issue is how do we not create kids that have fears or bad habits around money?

Money does NEED to be discussed and it should not be hidden from the kids. They do not need all the details of course but we do want them to appreciate money, respect money and understand the “value” of money. We also need to teach them money is earned as well, which I think makes it have more “value”. When you “work” for your “cash” and you think you want a new toy or something, usually that toy is taken better care of when the kids pay for it themselves. Trust me, I have witnessed it firsthand with my own child over the years. I’m not saying they have to work for ALL their toys. 😊These are the things our parents probably did with most of us as well. Sometimes as parents we “give” too much to the kids, even if we don’t have the money. It’s OK to sometimes say NO, or not at this time. We don’t need the kids to think there is no money, just that money is not like a faucet that has an endless flow of money. Social media has played a role in kids thinking they need to have what everyone else has! You can just say NO.

Maybe it’s Ok to show the kids the bills, like the electric bill and why we shut lights off when leaving the room. Opening a savings account for your children say between the ages of 7-12 or so is always fun. Make sure they are with you when you set up the account and the rule is they MUST put 15% of any money they earn or are given as a gift, into the account first. Then they can do what they want with the rest. This will help them get in the habit of “paying themselves first”. Not a bad idea to also encourage them to donate some of that money to a charity here and there. Once the kids are in high school or have a “paying” job, lets play it safe and for this conversation, they have a W-2 job working part time, you could consider opening a custodial ROTH IRA for the child. Keep in mind once they are 18 or 21, depending on your state laws, it’s their IRA now, so do go over the rules with them in detail. Custodial Roth IRA: Your guide to Roth IRAs for kids | Fidelity

Once they start high school. And college is on the horizon, you MUST talk about money! College is expensive! Even state schools can run as high as $35,000 per year! As parents we want to do everything for our kids, including paying for college. But it’s not always possible and this again is a time when it’s OK to say NO to some things. Maybe it’s NO to the most expensive college they picked, due to little or no aid. The budget is important here. If college debt is going to be more than what they will earn the first year out, might want to re-think the school choice…. Student loans are ok but keep it LOW! Show then the online calculators and how interest calculates! It’s 4 years of their lives, do they want to pay for it for 10+ years. Student Loan Calculator | Bankrate

If we talk to the kids throughout their lives about money and make it an open conversation maybe when it comes to large expenses like college, it will be an easier conversation? Discuss not spending more than you make, discuss paying yourself first, aka the 15% in the savings account, discuss investing and retirement accounts, show them your retirement account statements… Let’s talk money with our kids!