Young Savers Learn Valuable Money Lessons with Roth IRAs

By Clifton Linton
Senior Writer, mPower

In This Story Peter's Story Nichole's Story How to Do It The Rewards Life Lessons

When we first visited with Peter Gustafson in May, this nine-year-old entrepreneur hoped to open a Roth IRA with the money he earned cutting lawns and doing odd jobs around the neighborhood.

More important than getting a jump on retirement savings is the fact that he's getting a jump on money management skills.

minute: read this article at a glance.

Technical Terms Mutual fund Matching contribution Compound interest

The summer of 2000 was a good news, bad news period for nine-year-old Peter Gustafson.

The good news: He had a great baseball season and is likely to become pitcher of his Little League team next year.

The bad news: Chicago had a drought, so his lawn cutting business suffered. As fall arrives, he's $80 short of his goal of earning $500 to contribute to a Roth IRA. The lawns "haven't been growing. We haven't had a lot of rain," he lamented.

As we found out over the summer, Peter isn't the only young retirement saver out there. Nichole Ostner, 15, of Little Rock, Ark., also plans to put the $1,000 she earned over the summer into a Roth IRA.

Because they are beginning early and taking advantage of interest compounding, both have a unique opportunity to build up substantial retirement balances.

But at their ages, worrying about retirement funding is probably not the most important thing. What is key here is that this experience is teaching them some valuable lessons in money management, says Robert Weagley, a certified financial planner and associate professor of consumer and family economics at the University of Missouri.

Peter's Story

As we recounted in May, Peter Gustafson, at the urging of his parents, planned to contribute to a Roth IRA with his earnings from cutting lawns in his neighborhood.

A relatively dry August means that he's running behind schedule in reaching his $500 goal. But, like any good entrepreneur, he has a back-up plan. As fall progresses, he hopes to be hired by some of his neighbors to rake their leaves. And he's probably one of the few Chicagoans hoping for an early snow. While other citizens see it as an inconvenience, Peter sees dollars in those white flakes because the neighborhood driveways and sidewalks will need shoveling.

Once he has the money to open his Roth IRA, Peter, with the help of his father Kevin Gustafson, will have to decide how to invest it. One mutual fund company offers a low-initial-balance mutual fund targeted precisely for young kids, says Kevin.

Peter is thinking of another investment option. Several years ago he received a gift of some shares of McDonald's stock. He's considering adding to that position by purchasing more shares within his Roth IRA.

While it hasn't been a high flier of late, Peter's not worried. Like any good saver, he has a long-term view. "If I keep it until I get older, it might be worth more," he said.

Nichole's Story

Fifteen-year-old Nichole Ostner could give the Energizer bunny a good run for its money.

She must be battery powered in order to keep up her busy social calendar. This summer she went to two camps, visited Chicago and Florida, and traveled to Branson, Mo. twice. In between all these trips, she managed to earn $1,000 stuffing envelopes for her father, John Ostner, 63.

"I don't want (Nichole) to be afraid of money, as most people are." — John Ostner, president, Retirement Advisors Inc., in Little Rock, Ark.

She's been saving for the future for a few years. Last year she opened an Education IRA, and this year she plans to contribute to a Roth IRA. "I'll do this so I have money later in life," she said.

Her father has special insights concerning the need to start saving early. He's a financial planner and president of Little Rock, Ark.-based Retirement Advisors Inc.

John made sure that Nichole's college education funding was taken care of first. What Nichole's Education IRA doesn't cover, John plans to make up for mostly with money from his own retirement account. "That's my largest asset. We might as well spend it on her college, as much as anything else," he said.

Having a financial planner for a father helps Nichole cut down on her research time. "My dad suggests different investments to me," she said. But she's the one who finally pulls the trigger and decides which fund to invest in.

Like Peter, Nichole also understands that long-term investing and saving can have its ups and downs. Shortly after she opened her Education IRA last year, her investment in an Internet fund quickly lost a few hundred dollars. "I wasn't really worried. You have to ride it out," she said.

John hopes that by starting to save early, Nichole will also learn how compound interest works.

"I think we are teaching her the value (of) ... time," when it comes to saving, he said.

How to Do It

If your child needs a good place to save his or her summer earnings, a Roth IRA might be an ideal tool to use, according to Lorayne Fiorillo, financial advisor and author of Financial Fitness in 45 Days, The Complete Guide to Shaping Up Your Personal Finances.

There are, however, a few rules that need to be followed.

Read More Where can kids learn to save?

First, the child must have earned income in order to contribute to a Roth. That means dividends, interest income and allowances don't count. All the earnings should be documented, showing how much was earned, when and for what services.

Peter's father, Kevin, is keeping his records. Nichole's father, John, says he's keeping a "diary."

The Rewards

When asked her future saving plans, Nichole said she wants to continue contributing into her Roth account the $50 a month she earns from her father. But she didn't know how large her balance would grow over time.

We ran through a quick calculation. She expects to make an initial contribution of $1,000 for this year and continue contributing about $600 a year. She agreed that an 8 percent rate of return was a reasonable assumption.

When she found out her account could grow to $334,289 by the time she turns 63, her father's current age, her reaction was, "That's a lot!"

The above graph shows that by beginning tax-deferred saving at a young age, relatively small annual contributions can mean a great deal to a retirement balance. If Nichole continues to save, contributing $600 annually until she is 63 years old, her balance could really blossom. Whereas Peter's balance, assuming he doesn't contribute any more to his account, wouldn't show nearly the growth.

These accounts could be a nice resource to tap for major purchases such as college or a house. At any time, Peter or Nichole may remove their original contribution without penalty. Once they've had the IRAs for at least five years, they can also withdraw the earnings without penalty to pay for college or a qualified home purchase.

Life Lessons

While retirement is a very esoteric concept for both Peter and Nichole, by saving for it they are learning other, easier-to-understand money management concepts, such as earning interest on savings and the rewards of delayed gratification.

"If the child makes money and has control (over it), he learns how to make discretionary choices." — Robert Weagley, a certified financial planner and associate professor of consumer and family economics at the University of Missouri.

Nichole understands that her Roth IRA money is meant to be saved for a long time. "I don't think I'll need it soon ... not until I reach my dad's age," she said.

Both fathers plan to offer some kind of matching contribution so that their children will be able to have some spending money to use.

That's a key point, Weagley said. If the child is forced to put all the money into savings, he or she won't learn how to use it. By receiving spending money, the child can learn about many of the important decisions that go along with earning money.

"If the child makes money and has control (over it), he learns how to make discretionary choices. You can choose to save or choose to consume. If you choose to consume, you make choices again," Weagley said.

Dennis Filangeri, a certified financial planner based in San Diego, suggests that Peter and Nichole save in a Roth IRA as well as a regular savings account. That way, the kids can gain access to some money and won't have to tap their Roth. "They need to understand as well as they can ... (the Roth IRA) is not college money or money for a little motorcycle," he said.

Related Reading Peter's Roth IRA Expand College Savings with Education IRAs Getting Kids Interested in Interest ... and Investing!

In either case, the upshot is that the kids have the opportunity to learn how to manage money, rather than letting money manage them.

That's the lesson, John Ostner wants his daughter to learn. "I don't want (Nichole) to be afraid of money, as most people are," he said. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Young Savers Learn Valuable Money Lessons with Roth IRAs

By Clifton Linton
Senior Writer, mPower

In This Story Peter's Story Nichole's Story How to Do It The Rewards Life Lessons

When we first visited with Peter Gustafson in May, this nine-year-old entrepreneur hoped to open a Roth IRA with the money he earned cutting lawns and doing odd jobs around the neighborhood.

More important than getting a jump on retirement savings is the fact that he's getting a jump on money management skills.

minute: read this article at a glance.

Technical Terms Mutual fund Matching contribution Compound interest

The summer of 2000 was a good news, bad news period for nine-year-old Peter Gustafson.

The good news: He had a great baseball season and is likely to become pitcher of his Little League team next year.

The bad news: Chicago had a drought, so his lawn cutting business suffered. As fall arrives, he's $80 short of his goal of earning $500 to contribute to a Roth IRA. The lawns "haven't been growing. We haven't had a lot of rain," he lamented.

As we found out over the summer, Peter isn't the only young retirement saver out there. Nichole Ostner, 15, of Little Rock, Ark., also plans to put the $1,000 she earned over the summer into a Roth IRA.

Because they are beginning early and taking advantage of interest compounding, both have a unique opportunity to build up substantial retirement balances.

But at their ages, worrying about retirement funding is probably not the most important thing. What is key here is that this experience is teaching them some valuable lessons in money management, says Robert Weagley, a certified financial planner and associate professor of consumer and family economics at the University of Missouri.

Peter's Story

As we recounted in May, Peter Gustafson, at the urging of his parents, planned to contribute to a Roth IRA with his earnings from cutting lawns in his neighborhood.

A relatively dry August means that he's running behind schedule in reaching his $500 goal. But, like any good entrepreneur, he has a back-up plan. As fall progresses, he hopes to be hired by some of his neighbors to rake their leaves. And he's probably one of the few Chicagoans hoping for an early snow. While other citizens see it as an inconvenience, Peter sees dollars in those white flakes because the neighborhood driveways and sidewalks will need shoveling.

Once he has the money to open his Roth IRA, Peter, with the help of his father Kevin Gustafson, will have to decide how to invest it. One mutual fund company offers a low-initial-balance mutual fund targeted precisely for young kids, says Kevin.

Peter is thinking of another investment option. Several years ago he received a gift of some shares of McDonald's stock. He's considering adding to that position by purchasing more shares within his Roth IRA.

While it hasn't been a high flier of late, Peter's not worried. Like any good saver, he has a long-term view. "If I keep it until I get older, it might be worth more," he said.

Nichole's Story

Fifteen-year-old Nichole Ostner could give the Energizer bunny a good run for its money.

She must be battery powered in order to keep up her busy social calendar. This summer she went to two camps, visited Chicago and Florida, and traveled to Branson, Mo. twice. In between all these trips, she managed to earn $1,000 stuffing envelopes for her father, John Ostner, 63.

"I don't want (Nichole) to be afraid of money, as most people are." — John Ostner, president, Retirement Advisors Inc., in Little Rock, Ark.

She's been saving for the future for a few years. Last year she opened an Education IRA, and this year she plans to contribute to a Roth IRA. "I'll do this so I have money later in life," she said.

Her father has special insights concerning the need to start saving early. He's a financial planner and president of Little Rock, Ark.-based Retirement Advisors Inc.

John made sure that Nichole's college education funding was taken care of first. What Nichole's Education IRA doesn't cover, John plans to make up for mostly with money from his own retirement account. "That's my largest asset. We might as well spend it on her college, as much as anything else," he said.

Having a financial planner for a father helps Nichole cut down on her research time. "My dad suggests different investments to me," she said. But she's the one who finally pulls the trigger and decides which fund to invest in.

Like Peter, Nichole also understands that long-term investing and saving can have its ups and downs. Shortly after she opened her Education IRA last year, her investment in an Internet fund quickly lost a few hundred dollars. "I wasn't really worried. You have to ride it out," she said.

John hopes that by starting to save early, Nichole will also learn how compound interest works.

"I think we are teaching her the value (of) ... time," when it comes to saving, he said.

How to Do It

If your child needs a good place to save his or her summer earnings, a Roth IRA might be an ideal tool to use, according to Lorayne Fiorillo, financial advisor and author of Financial Fitness in 45 Days, The Complete Guide to Shaping Up Your Personal Finances.

There are, however, a few rules that need to be followed.

Read More Where can kids learn to save?

First, the child must have earned income in order to contribute to a Roth. That means dividends, interest income and allowances don't count. All the earnings should be documented, showing how much was earned, when and for what services.

Peter's father, Kevin, is keeping his records. Nichole's father, John, says he's keeping a "diary."

The Rewards

When asked her future saving plans, Nichole said she wants to continue contributing into her Roth account the $50 a month she earns from her father. But she didn't know how large her balance would grow over time.

We ran through a quick calculation. She expects to make an initial contribution of $1,000 for this year and continue contributing about $600 a year. She agreed that an 8 percent rate of return was a reasonable assumption.

When she found out her account could grow to $334,289 by the time she turns 63, her father's current age, her reaction was, "That's a lot!"

The above graph shows that by beginning tax-deferred saving at a young age, relatively small annual contributions can mean a great deal to a retirement balance. If Nichole continues to save, contributing $600 annually until she is 63 years old, her balance could really blossom. Whereas Peter's balance, assuming he doesn't contribute any more to his account, wouldn't show nearly the growth.

These accounts could be a nice resource to tap for major purchases such as college or a house. At any time, Peter or Nichole may remove their original contribution without penalty. Once they've had the IRAs for at least five years, they can also withdraw the earnings without penalty to pay for college or a qualified home purchase.

Life Lessons

While retirement is a very esoteric concept for both Peter and Nichole, by saving for it they are learning other, easier-to-understand money management concepts, such as earning interest on savings and the rewards of delayed gratification.

"If the child makes money and has control (over it), he learns how to make discretionary choices." — Robert Weagley, a certified financial planner and associate professor of consumer and family economics at the University of Missouri.

Nichole understands that her Roth IRA money is meant to be saved for a long time. "I don't think I'll need it soon ... not until I reach my dad's age," she said.

Both fathers plan to offer some kind of matching contribution so that their children will be able to have some spending money to use.

That's a key point, Weagley said. If the child is forced to put all the money into savings, he or she won't learn how to use it. By receiving spending money, the child can learn about many of the important decisions that go along with earning money.

"If the child makes money and has control (over it), he learns how to make discretionary choices. You can choose to save or choose to consume. If you choose to consume, you make choices again," Weagley said.

Dennis Filangeri, a certified financial planner based in San Diego, suggests that Peter and Nichole save in a Roth IRA as well as a regular savings account. That way, the kids can gain access to some money and won't have to tap their Roth. "They need to understand as well as they can ... (the Roth IRA) is not college money or money for a little motorcycle," he said.

Related Reading Peter's Roth IRA Expand College Savings with Education IRAs Getting Kids Interested in Interest ... and Investing!

In either case, the upshot is that the kids have the opportunity to learn how to manage money, rather than letting money manage them.

That's the lesson, John Ostner wants his daughter to learn. "I don't want (Nichole) to be afraid of money, as most people are," he said. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.