Forget the Christmas Club, saving strategies for youngsters are decidedly (and thankfully) updated.
Fidelity recently reported the results it’s seeing from its Roth IRA for Kids offering. While it’s always difficult to encourage delayed gratification, it’s doubly so with children.
However, the Boston-based investment behemoth’s efforts are encouraging.
From January 2016 through January 2018, new accounts have seen a 475 percent increase, with a compounded annual growth rate of 333 percent, it reports.
Assets have increased 2,399 percent, with a compounded annual growth rate of 400 percent during the same period.
Looking at 2018 alone, the product has realized a 39 percent increase in accounts and a 51 percent increase in assets from January through the end of June.
Average account size also increased to $3,801 at the end of June 2018 from $2,626 in 2016.
The growth is driven in large part by their popularity among parents with children under the age of 18 and relatives who want to give their kids a jumpstart on saving for the future.
“Parents know that time is on their child’s side and want to encourage good savings habits as soon as they’re able to start earning their own money,” Melissa Ridolfi, vice president of Retirement and College Leadership at Fidelity Investments, said in a statement. “Let’s be honest, convincing a child to hand over their hard-earned cash to invest in a Roth IRA may be challenging, but engaging in financial conversations when your child is beginning to understand the value of money can help them develop the discipline to make wise financial decisions later.”
A Roth IRA for Kids is a custodial account which can be opened and managed by any adult—a parent, grandparent, aunt, uncle or even a family friend—on behalf of a minor earning income.
Qualifying income can come from a job or self-employment such as babysitting, mowing lawns or shoveling snow. The earnings and withdrawals are free of federal taxes.
Tips for convincing kids to part with their summer job money
Summer job season offers a timely opportunity for parents to start a discussion with kids about dedicating some of their earnings to a retirement account, though the idea may seem de-motivating to a teen who is excited to have their first taste of financial freedom. Here are three tips to make the ‘money talk’ go a little easier for kids:
- Start Small: Focus the conversation on how small their contribution can be relative to their total take-home pay. Start by asking them to consider saving 10-15 percent: If they earn $100, that would be saving $10- $15. Later, emphasize the growth potential of that small savings to help them understand how small contributions can grow.
- Offer a “Match”: To make the idea of saving even more appealing, parents may want to consider offering to “match” their child’s contributions, to give them a head start in understanding how an employer 401k plan works.
- Demonstrate How Saving a Little Can Go a Long Way: One of the biggest financial regrets Fidelity hears from those who procrastinated on saving for retirement is, “I wish I’d started saving earlier.” Talking to kids about saving some of the money they’ve earned is an opportunity for parents to demonstrate how time is on one’s side when it comes to investing, and perhaps offer personal examples illustrating why they wish they had started saving when they started their first job.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
