tax strategy

Saving Summer

photo shows a shiny red push lawnmower sitting in green grass in front of a brown picket fence

In the United States, as in most places in the world, we are governed by the Gregorian calendar. But whether we’re watching our youth fling their mortarboards into the air or we’re flipping the page and entering the “-ber” months, many of us are facing once again the power of the all-important academic calendar. 

Children, grandchildren, and neighbors will be out of school for the summer for at least a few weeks in most parts of the country, and it’s got us reflecting. Without school, summer for many families can include more sleepovers or late nights and long chats on the porch. It could mean hours at the city pool or the anticipation of a big vacation. 

For some of us, summers have also meant more leisure and more work. 

It’s possible that you earned your very first dollar—and then some, hopefully—one summer long ago. Teens are more likely to be employed during June, July, and August than any other time of year. And it makes sense: teens are more likely to have the time and opportunity then, as jobs like lawnmowing, babysitting, and lifeguarding peak each summer. 

Clients, if anyone in your household under age 18 was out making money this summer, consider talking with them about the “Swiss Army Knife of finance”: the Roth IRA

As long as someone has earned income (and doesn’t make more than the cap), they can contribute to a Roth IRA (up to the maximum amount). This means they might contribute up to the smaller of $6,000 or their 2022 total earned income. 

Say your child or grandchild earns $3,000 in the summer: they could contribute up to $3,000 to a Roth. Of course, they may not want to forfeit all their earnings, but if they’re able to, this may be a prime opportunity to impart the value of saving. If you’re feeling nice, you could “gift” them the $3,000 to replace what they saved. Better yet, offer them a match: you pay them back some percentage of what they save.

Roth contributions are taxable now and enjoy tax-free future gains. Beyond the magic of compounding, starting a Roth account early has other benefits: 

  • At any time, you may withdraw contributions without facing a penalty or taxation. 
  • Beginning five years after the Roth was opened and funded, account holders can take out up to $10,000 (earnings and contributions) to fund the purchase of their first home, tax- and penalty-free.  
  • Beginning five years after the Roth was opened and funded, account holders can use it to pay for qualified college expenses, penalty-free (earnings will be taxed as regular income). 

As children near college age, investors may have questions: the government does not include retirement accounts as assets in the calculations for student aid, so this type of savings vehicle should not impact the availability of federal financial aid. 

Withdrawals would be counted in the calculation, but be aware: the FAFSA uses a “prior-prior year” income picture to avoid having to base their decisions on estimations. So, for example, even withdrawals made in a 4-year graduate’s junior year shouldn’t affect their aid eligibility. 

The process of getting something like this set up isn’t terribly complicated. It is not necessary that the working person have a W-2, though we do recommend keeping records (think: basic invoices or even simple receipts from the neighbors for those lawnmowing or babysitting services). 

Clients, could this be a way to help your children or grandchildren preserve a piece of summer? Call or write, anytime.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. 

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