How to Track Your Teen's Family 401(k)

The “Family 401(k)” is my all-time favorite family finance hack for parents seeking to help teens grow their wealth and investing IQ over decades. I’ve written and talked about the technique many times since 2011, and I’ve put it into practice with all 5 of my kids.

The Family 401(k) is a homespun version of the workplace 401(k) program commonly offered to employees. With a workplace 401(k), an employer kicks in extra money to help the employee build wealth in a tax-advantaged company sponsored retirement account. With a Family 401(k), parents kick in extra money to help their child grow wealth in a tax-advantaged individual retirement account known as a Roth IRA.

For the uninitiated, the quick recipe for the Family 401(k) is:

1. Set up a Roth IRA for your teen as soon as they earn their first W-2 paycheck for a summer or part-time job.
2. Offer matching and/or gifting incentives to maximize your teen’s eligible Roth IRA contribution for the year. To ease the parental financial burden of a match or gift, see if grandparents, aunts, or uncles are willing to pitch in too — perhaps in lieu of a more typical birthday, graduation, or holiday gift.
3. Invest the contribution. Put the contributed dollars to work. I favor parking them in low cost, diversified index funds like VTI for the long haul, but consult your investment adviser before making your own decision.
4. Rinse and repeat every year your child meets the eligibility requirements (even into the young adult years if possible), adjusting matching or gifting levels as appropriate for your family’s situation.

For more details on the Family 401(k) technique, read here and here, or listen here (podcast), or watch here (YouTube).

Here’s why I love the Family 401(k) arrangement so much:

1. It requires work. No paycheck, no participation.
2. It forces a long term investing mindset. Early qualified distribution rules aside, the money is essentially locked up until age 59 and a half. Or, as a teen would say, “forever”.
3. It’s tax efficient. As per Roth IRA rules, investment earnings grow tax free and qualified withdrawals incur no tax on the way out.
4. It can be truly life changing. If you start early, invest wisely, and follow through each year, your teen will be sitting on a sizable nest egg decades later. Your teen will also accumulate considerable investing experience and wisdom which will undoubtedly pay dividends elsewhere.

That’s all likely a review for longtime FamZoo readers, but here’s one new Family 401(k) tidbit I haven’t shared to date: how to track and share Roth IRA progress with your teen in a way that motivates continued participation and appreciation.

I built a simple spreadsheet for each child’s Roth IRA that tracks contributions and earnings for prior years and (crudely) projects the potential trajectory into the future. As part of my annual tax time ritual, I update the spreadsheets and review them with the children just before we make any allowable contributions for the year. The simple updates take just a few minutes and the conversations are on the order of 30 minutes. No big deal.

The tracking spreadsheet includes a simple trend chart to anchor the annual conversation:

• A stacked bar is shown for each year from inception through the year the child will turn 60.
• The blue base of each bar shows the total cumulative contributions made to date.
• The upper dark green portion of each bar shows the total investment gains earned to date.
• Bars for future years are rough estimated projections based on expected contributions and projected investment returns (light green).

Here’s what the trend chart looks like for my oldest (I have clipped the left axis with the dollar amounts for privacy, but it’s on track for a significant nest egg at 60):

To get started with the tracking sheet, you’ll fill in three parameters: the Roth IRA start year, your teen’s starting age, and the expected annualized return of your selected investment portfolio.

Each year, you’ll fill in just two numbers for the previous calendar year: the Roth IRA contribution you made that calendar year and the year-end balance for the Roth IRA account.

After updating the spreadsheet, sit down with your child and review:

• The contribution and ending balance entries for last year. Show your child where you located those values within the Roth IRA account’s statements or its online history.
• This year’s contribution. Discuss the eligible contribution you’ll be making for this year and its source — some mix of family matching funds, family gifts, or teen contribution depending on your arrangement.
• The current trend. How have actual investment gains (dark green portion of bars) fluctuated with market conditions? For example, note the dip in 2022 followed by the rebound in 2023 for my child’s chart above. Markets are not always up and to the right — especially in the short run! How are things looking for your child’s 60th birthday? The message: long term, uninterrupted compounding is extremely powerful.
• Expected annual return. Does the parameter value you’re using for your projections still seem reasonable? For example, according to ChatGPT, the Vanguard Total Stock Market ETF (VTI) has had an annualized return of 8.1% since its inception in 2001. Is that a reasonable figure to expect going forward? How does increasing or decreasing the assumed annualized return parameter affect the final projected value? Should you change any of your investment choices?
• Current Roth IRA rules. Are the participation rules or contribution limits changing? Are there any new rules regarding qualified distributions that might make an early withdrawal attractive? (A confession: I always just tell my kids they can’t access the money until they’re 59 and a half — a minor falsehood, but delivered with the best of intentions. 😉)

The tracking may sound a bit daunting at first, but with my ready-made template it’s easy-peasy. Just 3 numbers up front, 2 numbers each year, and 1 annual discussion and you’ll generate countless benefits for life.

👉 To get your own copy of my Roth IRA Tracker Google Sheet, click here.