Pave the Road to Retirement For Your Working Teen With A Family 401(k)

Your teen just landed that first summer or part time job. Congratulations!! Now’s the time for your teen to start thinking about...wait for it...retirement! Seriously? Yep, and you can help with one of my all-time favorite family finance tips for parents with teens. Just watch this two minute video or read on.

Dan Kadlec over at MoneyWatch.com calls it the “Family 401(k)”, and I just set one up for 2 of my teens.

It takes only 30 minutes now and yields benefits that last a lifetime. It gets your teens off the couch, teaches ’em the power of compounding, takes full advantage of Roth IRA tax benefits, and gets ’em started on taking control of their financial future. The way things are headed, they’re gonna need to start early.

So what is a Family 401(k)?

It’s where the parents (or grandparents, or rich aunt, or some combo) agree to make contributions to a teen’s Roth IRA. They match some percentage of the teen’s earned income — typically from a summer or part-time job.

It’s like the concept of a real 401(k) where a company makes matching contributions to a retirement account, but in this case it’s the supporting family members making contributions. The teens often don’t make any actual contributions themselves — at least not at first — since most teens don’t have much left from their paycheck after “critical expenses” (yes, tongue firmly in cheek there).

Here are the 4 quick steps:

Step 1: Make a deal.

Mine was: “If you work this summer, I’ll double your money (up to five grand)” That gets their attention. Remember, that’s just my deal — choose whatever percentage makes sense for your situation — maybe even split it between relatives.

Step 2: Show’em the (future) money.

When I say: “OK, the bad news is: you can’t spend it until you’re 59 and a half.” The eyes glaze. But I get the focus back with: “The good news is, by then you could have several hundred thousand bucks squirreled away — maybe even a million.” That’s when my son said “Whoa!” Find a savings calculator and show’em some different scenarios.

Step 3: Set up the Roth IRA

If your teen is already 18 like my oldest, it’s super easy. All online.

Here are the screens I filled out on Sharebuilder.com (see video).

Boom, boom, boom. 15 minutes tops and you’re done.

If your teen is under 18 like my next son down, it’s a little trickier.

You have to set up a custodial account to manage on your teen’s behalf. A lot of the popular financial institutions I tried — Sharebuilder, Fidelity, Vanguard, T Rowe Price — didn’t support that setup.

But Schwab has a really nice, clear program. Fill out the forms online, print, sign, write a check and bring it all into the local Schwab office where Nick got us all set up in less than 5 minutes. You can mail it all in too.

Step 4: Invest

Remember that millionaire bit? That ain’t gonna happen if you leave the deposit in a sweep account. It’s just a few clicks to invest, but the hard part is picking the actual investments. I’m just a Dad and a software geek, not a stock picker, so you’re on your own there. After a little googling around, some work with Sharebuilder’s nice online research tools, and a little chit-chat with the boys about diversification and long-term thinking, I went with something that would just mirror the overall US stock market. Next year, we’ll balance that with an International index fund.

That’s it. You’re done, and you’ll feel really good about it!

Your teens may not thank you now, but they’ll definitely thank you in 40 or 50 years. I hope you’re still around to hear it in person!

P.S. Here are some references that I found helpful:

P.P.S. Disclaimer: this article is for informational purposes only and in no way should be relied upon for financial advice. Be sure to consult your own financial advisor when making decisions regarding your financial management.


zmo aka The Blog Post Author

Ver true, investing early is key

Unknown aka The Blog Post Author

Teens around the nation are wasting money on consumption spending that they could be using for future endeavors like saving for retirement or starting with a diversified stock portfolio. You hit the nail on the head when you said, "It takes only 30 minutes now and yields benefits that last a lifetime."

What great insight. A website that can be very helpful to your teens in teendollars.org. It is a student run website out of a Cincinnati, OH public school. Their motto is, "teens teaching teens about money." They have great content and can really relate to the teenagers.

Kyle Simpson, teendolalrs.org

Kelsie Vaske aka The Blog Post Author

Intriguing! Teens everywhere are blowing paychecks on mindless material items. I might just take this to my parents.
Another way for teens to learn about saving and managing money is teendollars.org, its a student run website out of Reading High School in Ohio.

Kelsie Vaske, teendollars.org

Bill Dwight aka The Blog Post Author

Kyle and Kelsie, thanks for stopping by and checking out the video. I like your mission of "teens teaching teens about money" - best of luck with your site! -Bill

Unknown aka The Blog Post Author

I already knew about Custodial IRAs, but I just wanted to say I am so glad I chose FamZoo over the many competitors out there. You just don't get helpful tips like this. Way to go Bill!

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