1. Use Your Tax Return as a Guide

Before you file it away, take a quick look at what actually happened last year:

• Where did your income really come from?
• How much did you pay in taxes?
• Did anything surprise you (a big refund or an unexpected bill)?

Ask yourself: Was this what I expected?

If not, that’s helpful. It usually means there’s something worth adjusting now—not next year.

2. Adjust Withholding or Estimated Payments

If you owed more than you expected or got a much bigger refund than you planned, it’s probably time to fine-tune things:

• Update your paycheck withholding
• Revisit estimated tax payments (especially if you’re retired or self-employed)

The goal here isn’t perfection. The goal is just to avoid big surprises and smooth out your cash flow.

3. Revisit Your Tax Strategy for This Year

Now that you’ve seen how last year played out, you can be more intentional this year.

A few things to think about:

• Does a Roth conversion make sense this year?
• Should you shift income between years if you have flexibility?
• Are there opportunities to realize gains or losses more strategically?

4. Update your Contributions

This is one of the easiest things to review and update during your “spring cleaning.” Be sure to increase your contributions to your 401k and/or IRA’s to max out for the year.

For 2026, contribution limits have increased to:

• 401(k): $24,500 (+ $8,000 catch-up if 50+, or up to $11,250 if ages 60–63)
• IRA (Traditional or Roth): $7,500 (or $8,600 if 50+)
• HSA: $4,400 individual / $8,750 family (+ $1,000 catch-up if 55+)

If you can:

• Increase your automatic contributions
• Revisit your IRA or HSA funding plan
• Make sure your savings still match your current income

Even small changes now can make a noticeable difference by the end of the year.

5. Clean Things Up and Simplify

This is the “spring cleaning” part. Take a little time to:

• Consolidate old retirement accounts
• Double-check your beneficiaries
• Organize important documents
• Cancel or unsubscribe from things you don’t use anymore

6. Revisit Your Investment Mix

The market has moved around a lot over the last year and your portfolio can drift more than you realize. After tax season is a great time to:

• Review your allocation
• Rebalance if needed
• Make sure your investments still line up with your timeline (especially if retirement is getting closer)

Filing your taxes isn’t really the finish line—it’s more like the starting point for making smarter decisions this year. A few small, intentional adjustments now can go a long way toward reducing taxes over time, improving cash flow and feeling more confident about what’s ahead. If you have questions about any of this, feel free to reach out! We’re always happy to help you get things organized and on track for the year ahead.

The post Spring Cleaning for Your Finances: What to Do After You’ve Filed Your Taxes appeared first on MainStreet Financial Planning.

• Transfer cash held in digital wallets like Venmo, PayPal and Cash App to your bank account monthly.
  • Benefit: Funds held in these apps are not FDIC insured. Moving them protects your money—and allows it to earn interest.
• Vacuum out your dryer vent at least annually.
  • Benefit: Your dryer runs more efficiently, and more importantly, you significantly reduce the risk of a house fire.
• Make a credit card payment twice a month.
  • Benefit: Your credit score could increase by lowering your credit utilization rate before the lender reports your balance to the credit bureaus.
• Take photos of your ID, passport, and credit cards and store them in a hidden folder on your phone.
  • Benefit: If items are lost or stolen, you’ll have quick access to important details and customer service numbers securely stored in a password-protected Hidden/Locked/Secure folder.
• Write a postcard to a friend you haven’t spoken to in a while. A stamp for the standard domestic postcard (4 ¼” high by 6” long) costs $0.61.
  • Benefit: Staying socially connected can reduce loneliness and positively impact your long-term health and happiness!

At the end of the day, progress doesn’t come from grand resets—it comes from small, repeatable choices that quietly stack in your favor. Whether it’s reconnecting with someone you care about, protecting your money, improving your safety, or strengthening your financial footing, these simple to-dos are easy to overlook but powerful when practiced consistently.  If your New Year’s intentions wobbled a bit, that’s okay—consider this your reminder that a reboot is always available, and even the smallest habits can make a meaningful difference over time.

Related reading:

Good Habits Need Good Techniques — a practical look at how to build habits that actually last.

The post Good Habits for the New Year appeared first on MainStreet Financial Planning.

Here are four smart year-end check-ins to complete before December 31st.

1. Review Your Spending Plan

• Look over your 2025 expenses. Are there new recurring costs that should be added? Any unused subscriptions or services that can be canceled?

• Identify areas where spending could be reduced or redirected to better support your 2026 financial goals.

• If you’re not currently using a budgeting system, here’s a great place to start:

  3 Alternatives to the Mint Budgeting App

• Consider using a budgeting or cash-flow app to simplify tracking the flow of money throughout the year.

2. Strengthen Your Emergency Fund

• Aim for 3–6 months of essential expenses saved in a high-yield savings account.

• Reevaluate your target amount based on life changes in 2025—job transitions, higher expenses, more dependents, or fewer earners.

• If your emergency fund is below your target, set a plan for steady monthly contributions in 2026 to rebuild your reserves.

3. Check In on Your Investments

2025 Retirement Contribution Limits

• 401(k)/403(b)/TSP employee deferrals: $23,500
• IRA (Traditional or Roth): $7,000
• Catch-up contributions (age 50+):
  • $7,500 for workplace plans

  • $1,000 for Traditional and Roth IRAs

• Special catch-up for ages 60–63: $11,250 (if your employer plan allows it)

Year-End Investment Actions

• If you aren’t maxing out your accounts, consider increasing contributions by 1% for 2026—small increases compound significantly over time.

• Review your portfolio allocation. Market swings throughout the year shift your mix of stocks, bonds, and cash.

  A year-end rebalance helps realign your investments with your risk tolerance and long-term goals.

• Not sure whether your portfolio is positioned correctly? Reach out to our team—we’re happy to help.

4. Review Your Required Minimum Distributions (RMDs)

If you are age 73 or older in 2025, or if 2025 is your first RMD year, this is a key item to address before December 31st.

What to know:

• If you turned 73 in 2024, your 2025 RMD must be taken by December 31, 2025.

• If you turn 73 in 2025, this is your first RMD year:

  • You may take your RMD anytime in 2025 or delay it until April 1, 2026.

  • But delaying means taking two RMDs in 2026, which may increase your taxable income.

• Confirm that all RMDs are withdrawn from the correct retirement accounts (IRAs, 401(k)s, 403(b)s, etc.).

• The penalty for missed RMDs is 25% of the amount not withdrawn (reduced to 10% if corrected promptly).

If you need help calculating or coordinating your RMDs, our team is here to walk you through the process.

Additional Resources to Support Your 2025 Wrap-Up

• 5 Year-End Tax Moves to Make Now (Anna Sergunina)

• 5 Ways to Get Organized in the New Year (Cynthia Flannigan)

• One Financial Habit to Change (Cynthia Flannigan)

The post Review These 4 Financial Tips Before December 31, 2025 appeared first on MainStreet Financial Planning.

Here’s what you need to know to avoid Medicare late enrollment penalties while continuing to work past age 65.

Understanding Medicare Parts and Potential Penalties

Medicare consists of several parts, and not all of them are mandatory at age 65. But delaying enrollment in certain parts without proper coverage can result in permanent financial penalties.

Do You Need to Enroll in Medicare at Age 65?

That depends on your current health insurance:

• If your employer (or your spouse’s) has 20 or more employees, and you’re actively working, you can delay enrolling in Medicare Part B and D without penalty. The employer’s plan is considered creditable coverage, meaning it meets Medicare’s standards.
• If the employer has fewer than 20 employees, you generally must enroll in Medicare when you turn 65. In this case, Medicare becomes your primary insurance, and delaying could lead to gaps in coverage and penalties.

When You Retire: Use the Special Enrollment Period (SEP)

Once you stop working or lose employer coverage (whichever happens first), you enter what Medicare calls a Special Enrollment Period. This allows you to sign up for Medicare without facing penalties.

• You have 8 months to enroll in Part B after your employment or group coverage ends.
• You have 63 days to enroll in Part D after your drug coverage ends.

Failing to enroll within these windows can trigger the penalties listed above.

Key Steps to Avoid Penalties

1. Confirm Your Employer Coverage Is Creditable
   Talk to your HR or benefits administrator to confirm whether your current plan counts as creditable coverage for Medicare Parts B and D.

• Creditable coveragemeans the employer health plan is at least as good as Medicare.
• If your current employer coverageis creditable, you may be able to delay enrolling in Medicare Part B and/or Part D without penalties.
• If it’snot creditable, you need to enroll in Medicare when first eligible to avoid penalties and coverage gaps.

1. Gather the Required Paperwork
   When you retire and apply for Medicare Part B, you’ll need to submit Form CMS-L564 (Request for Employment Information), signed by your employer. This proves you had coverage and qualifies you for penalty-free late enrollment.
2. Time Your Enrollment Carefully
   Enroll during your Special Enrollment Period instead of using the General Enrollment Period (January 1–March 31), which may result in a coverage gap and penalties. Also, COBRA isn’t considered group health plan coverage, so again, use the Special Enrollment Period!

Should You Enroll in Medicare Part A at 65?

Many people enroll in Medicare Part A at 65, even while working, because:

• It’s free if you or your spouse worked and paid Medicare taxes for at least 10 years.
• It can serve as secondary insurance to your employer plan.

However, if you have a Health Savings Account (HSA) and want to continue contributing to it, do not enroll in any part of Medicare, including Part A. Once you enroll, you can no longer contribute to your HSA.

Working past 65 doesn’t mean you’ll be penalized by Medicare — but it does require some proactive planning. By understanding your coverage, and acting during the correct enrollment windows, you can avoid costly mistakes and ensure a smooth transition when you’re ready to retire.

Go to www.medicare.gov for more information and download the Medicare and You handbook. These resources can answer many of your questions about enrolling for Medicare.

The post How to Avoid Medicare Penalties When Working Past 65 appeared first on MainStreet Financial Planning.

1. Freeze Your Credit

If you temporarily unfreezed your credit for a loan or new credit card last year, be sure to re-freeze it now. Freezing your credit is an effective way to protect against identity theft and unauthorized access to your financial accounts.

2. Update Your Home Inventory

Take a few moments to review and update your home inventory, whether you keep it in an app, a spreadsheet, or through photos on your phone. Removing items you no longer own and adding new purchases will ensure your inventory is accurate and ready for insurance purposes if needed.

3. Scrutinize Your Credit Report

Visit annualcreditreport.com to get your free credit reports from the three bureaus: Experian, TransUnion, and Equifax. Verify that the information is accurate and that all your credit cards, store accounts, and loans are properly listed. This will help catch any errors or fraudulent activity. If you notice discrepancies, file a dispute with the relevant credit bureau.

4. Verify Your Social Security Earnings

Your Social Security benefits are based on your earnings record, so it’s crucial to ensure your reported income is correct. Log into myssa.gov to view and confirm your earnings history. If you notice any errors, you can easily request a correction online. For 2024, the maximum taxable earnings subject to Social Security tax is $168,600. Double-checking this annually ensures your record stays accurate for future benefit calculations.

5. Review Your Estate Planning Documents

Take some time to review the key documents in your estate plan, such as your will, power of attorney, and property deeds. Whether they’re stored in physical files or securely stored digitally, it’s important to confirm they’re updated and easy to access should you need them.

6. Revise Your Annual Budget

Look over your budget from the previous year and make adjustments for 2024. Tools like Tiller, Monarch, or YNAB can help you track your spending and ensure you stay within your financial goals. While inflation can increase certain costs, staying aware of your spending is the key to preventing your expenses from creeping up.

7. Prepare for Tax Season

Organize your tax documents in one central location—whether it’s a folder, box, or basket—to avoid scrambling when it’s time to file. You’ll receive a mix of mailed forms, emailed notices, and online documents, so keeping everything in one place will save you time and hassle when tax season arrives.

By checking these key items annually, you’ll stay on top of your financial health and be ready for whatever the year brings. Starting the year with these updates will give you peace of mind, knowing your finances are secure and organized.

The post Start the Year Strong: Get Your Financials in Shape for 2025 appeared first on MainStreet Financial Planning.

1. Reflect on the Past Year – Celebrate the wins and learn from the challenges

Before you dive into setting new financial goals, take a moment to reflect on the year that’s passed. What worked well in 2024, and what could have gone better? Reflecting on past goals—whether you hit them or fell short—can help identify areas of strength to build on and weaknesses to address. Research shows that acknowledging even small accomplishments fosters a growth mindset, which boosts motivation and performance. Consider journaling about your key wins and challenges, then use these insights to set more realistic and achievable goals for 2025.

2. Set Clear, Measurable Goals

According to Harvard Business Review, breaking large goals into smaller, measurable milestones increases the likelihood of success. Instead of vague goals like “save more money,” be specific. For example, aim to save $5,000 for an emergency fund or reduce debt by $2,000. The more specific and measurable your goal, the easier it will be to track progress. Break down large goals into smaller, manageable milestones, and celebrate each achievement along the way.

3. Write Down Your New Goals

Don’t just think about your goals—write them down! A study from the Dominican University of California found that people who wrote down their goals were 33% more successful in achieving them than those who didn’t. When you write your goals, you commit to them. Keep them visible—on your desk, refrigerator, or bathroom mirror—to reinforce your dedication and remind you of your priorities every day.

4. Create a Realistic Budget

A budget is telling your money where to go instead of wondering where it went,” says leadership coach and author, John Maxwell. This is one of the most essential steps in building a successful financial strategy. Start by evaluating your income and monthly expenses, then allocate funds toward your savings, investments, and debt repayment goals.

But remember, flexibility is key. Life is unpredictable, so allow room for unexpected costs, while also being realistic about your spending habits. A well-crafted budget isn’t about restriction; it’s about making sure every dollar works toward your bigger financial goals.

5. Prioritize Your Financial Goals

It’s easy to feel overwhelmed by a long list of financial objectives, but research shows that prioritizing goals significantly increases the likelihood of success. Focusing your energy on fewer, high-impact goals allows you to make faster, more meaningful progress.

Start with the essentials, like building an emergency fund or paying down high-interest debt. Once these are under control, gradually shift your focus to long-term goals like saving for retirement or buying a home. By addressing the most urgent goals first, you’ll build the financial security necessary to tackle larger ambitions down the road.

6. Track Your Progress Regularly

Peter Drucker famously said, “You can’t manage what you don’t measure.” Tracking your progress is crucial to staying on track and adjusting your approach when needed. Whether you use a budgeting app like Monarch Money, a spreadsheet, or even a simple journal, monitoring your income, expenses, and savings will help you stay focused and motivated.

Studies have shown that tracking progress increases your chances of success. Regular check-ins allow you to celebrate small wins, stay motivated, and tweak your strategy if things aren’t going as planned. By checking in monthly or quarterly, you can course-correct and make sure you’re always moving toward your goals.

2025 is a year full of opportunities to take control of your finances and build a strong foundation for the future. By setting clear, measurable goals, sticking to a budget, and regularly tracking your progress, you can make this year your most financially successful yet. Stay committed, stay focused, and enjoy the journey toward financial freedom!

The post New Year, New Financial Goals: Five Tips for Setting Yourself Up for Success in 2025 appeared first on MainStreet Financial Planning.

1. Maximize Your Retirement Contributions:

Enhancing your retirement savings not only secures your future but also offers immediate tax benefits. For 2024, the IRS has increased contribution limits:

– 401(k), 403(b), and most 457 plans: You can contribute up to $23,000. If you’re 50 or older, you can make an additional catch-up contribution of $7,500, bringing the total to $30,500.

– Traditional and Roth IRAs: The contribution limit is $7,000, with an extra $1,000 catch-up contribution for those 50 and above, totaling $8,000.

While IRA contributions for 2024 can be made until April 15, 2025, contributing before year-end allows you to benefit from tax-deferred growth sooner.

2. Harvest Tax Losses

If you have investments that have declined in value, consider selling them to offset capital gains from other investments—a strategy known as tax-loss harvesting. You can use up to $3,000 of net capital losses to offset ordinary income, with any excess carried forward to future years. Consult with a tax professional to navigate the complexities and avoid wash-sale rules.

3. Prepay Deductible Expenses

If your itemized deductions are close to the standard deduction thresholds—$14,600 for single filers, $29,200 for married filing jointly, and $21,900 for heads of household in 2024—prepaying certain expenses can help you exceed the standard deduction and maximize your tax benefits. Consider:

   – Mortgage Interest: Making an extra mortgage payment to increase deductible interest.

   – Medical Expenses: Scheduling and paying for medical procedures or expenses before year-end, especially if they exceed 7.5% of your adjusted gross income.

 – Property Taxes: Paying property taxes due in early 2025 before December 31, 2024, keeping in mind the $10,000 cap on state and local tax deductions.

– Tuition Payments: Prepaying college tuition for the upcoming semester may qualify you for education credits, such as the American Opportunity Tax Credit, worth up to $2,500 per eligible student. Be aware of income phase-out ranges for these credits.

4. Bundle Charitable Contributions

If your charitable donations don’t typically exceed the standard deduction, consider “bunching” multiple years’ worth of contributions into one year to maximize your itemized deductions. Establishing a donor-advised fund allows you to make a large charitable contribution in one year, receive the tax deduction, and distribute funds to charities over time. This strategy is particularly effective if you have appreciated securities, as donating them can help you avoid capital gains taxes.

5. Contribute to a 529 College Savings Plan

Contributions to a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. While there’s no federal tax deduction for contributions, many states offer tax benefits. For example, California does not provide a state tax deduction for 529 contributions, but the tax-free growth and withdrawals still offer significant benefits. Check your state’s specific rules to understand the potential tax advantages.

By implementing these strategies before December 31, you can optimize your tax situation and set a strong financial foundation for the upcoming year. Always consult with a tax professional, (we happy to help you as well) to tailor these strategies to your personal circumstances and ensure compliance with current tax laws.

The post Save on Taxes with These 5 Year-End Financial Tips appeared first on MainStreet Financial Planning.

What is an HSA?

A Health Savings Account (HSA) is a special type of savings account that allows individuals with a high-deductible health plan (HDHP) to save money pre-tax for future medical expenses. The funds can be used for qualifying medical costs like doctor visits, prescription medications, dental care, and vision services.

The real beauty of HSAs lies in their triple tax advantage:

1. Tax-deductible contributions: The money you contribute to your HSA is pre-tax, which lowers your taxable income.
2. Tax-free growth: Any interest or investment earnings grow tax-free.
3. Tax-free withdrawals: When used for qualified medical expenses, withdrawals are also tax-free.

How Does an HSA Work?

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). Contributions to the HSA can be made by both individuals and employers. In 2024, the annual contribution limits are:

– $4,150 for individuals.

– $8,300 for families.

– Those over 55 can make an additional $1,000 catch-up contribution.

One great feature of HSAs is that the funds roll over year after year, unlike Flexible Spending Accounts (FSAs) where unused funds can expire at the end of the year. This makes HSAs a great tool for both short-term healthcare costs and long-term financial planning.

How to Invest Your HSA

Beyond just saving for medical expenses, HSAs offer investment opportunities. Once you’ve built up enough savings, many providers allow you to invest your balance in mutual funds, ETFs, and stocks—much like you would with a retirement account. This allows the funds to grow over time, providing an additional cushion for future medical costs, especially during retirement.

For example, if you can cover your medical expenses out of pocket now, you can let your HSA balance grow tax-free for decades. After age 65, you can even withdraw the funds for non-medical expenses without penalty, although the funds will be subject to regular income tax.

Top HSA Providers

Choosing the right HSA provider is key to maximizing your account’s benefits. Here are three top providers to consider:

1. Fidelity – Best for Investment Options

Fidelity offers a wide range of investment opportunities with no account fees and no minimum balance required to start investing. It’s ideal for those who want to actively grow their HSA funds.

2. Lively – Best for Low Fees

Lively is known for its fee-free structure and flexibility. It partners with Schwab platform for investment options, offering a simple yet robust platform for HSA management.

3. HealthEquity – Best for Automated Investment Help

HealthEquity provides robo-advisor options for those who prefer a hands-off approach to investing their HAS, Vanguard funds as an option. It’s also a great option for employer-sponsored HSAs, offering seamless integration with payroll systems.

What Can You Use an HSA For?

HSAs can be used for a wide range of qualified medical expenses, such as:

– Doctor visits and co-pays.

– Prescription medications.

– Dental and vision care.

– Acupuncture and physical therapy.

After age 65, HSAs become even more flexible, allowing you to use the funds for non-medical expenses without facing a penalty. However, non-medical withdrawals will be subject to regular income tax, similar to traditional IRA withdrawals.

HSAs as a Long-Term Planning Tool

While HSAs are great for covering immediate medical expenses, they also serve as a powerful tool for retirement planning. Medical expenses often rise in retirement, and having a dedicated account that grows tax-free can help ease the burden. Many people use their HSA as a supplemental retirement fund, tapping into it during their golden years for healthcare costs, which are tax-free.

Even if you don’t use all the funds for medical purposes, HSAs remain one of the most tax-advantaged savings accounts available, making them an excellent part of any long-term financial strategy.

Health Savings Accounts offer a unique opportunity to save for medical expenses while also benefiting from long-term tax advantages. Whether you’re looking to reduce your current healthcare costs or build a nest egg for future needs, an HSA can be a key component of your financial strategy.

Take action today:

Look into opening an HSA if you haven’t already, and consider maximizing your contributions to benefit from this powerful financial tool. For those with existing HSAs, it may be time to start thinking about how you can invest those funds for even greater growth.

The post Unlocking the Power of Health Savings Accounts (HSAs) appeared first on MainStreet Financial Planning.

1. Healthcare
Open enrollment is an excellent time to reassess your healthcare needs for the upcoming year. Here are a few items to review for your healthcare benefits:

Consider if you need to change the type of healthcare plan you will have for the upcoming year. If you have an upcoming surgery or a baby on the way, a lower-deductible health plan might be beneficial. Conversely, if you are generally healthy and don’t anticipate significant medical needs, a high-deductible health plan could be more cost-effective.

If you do choose the HDHP, you may also have the option to open a Health Savings Account (HSA) where you can contribute pretax dollars to an investment account that can grow and be withdrawn tax-free to be used for eligible healthcare expenses over the rest of your life.

Does your employer offer a Flexible Spending Account?  If so, you have the benefit of setting aside a specific amount from each paycheck, pretax, to go into an account to be used for various healthcare expenses for that year. The trick with an FSA is that these dollars don’t roll over every year so you may need to adjust how much you contribute each year based on what you expect to spend on healthcare-related expenses for the upcoming year.

2. Disability Insurance
Check whether you have disability insurance through your employer. Some employers automatically provide this benefit, covering the premium and offering about 60-65% of your income if you need it. If your employer offers you the option to purchase additional coverage, remember that paying the premium yourself means your disability income will be tax-free. If your employer pays the premium, the income will be taxed, which can affect your take-home amount. Understanding your coverage and tax implications is crucial to ensuring you have adequate protection. Use open enrollment as a time to confirm you have disability insurance, review how much coverage you have, and consider whether you might need additional coverage through a private policy if what you have through work would not be sufficient for your family.

3. Life Insurance
Review your life insurance options during open enrollment. Employers often provide a base amount of life insurance, typically one to two times your salary. You may also have the option to purchase additional coverage for yourself or your spouse. Group policies offered through employers are usually more cost-effective, making this an opportune time to secure adequate life insurance, especially after significant life changes like marriage, home purchase, or childbirth.

4. Legal Benefits
I’ve seen a lot more employers starting to offer legal services to their employees. This could be useful to you if you need estate planning done, which could be at a free or reduced cost through your benefits. There are also legal plans you can sign up for that allow you a set number of hours of legal counsel as well. Be sure to check your full benefits package to see if this is available to you!

I hope this helps you in reviewing your employer benefits during this open enrollment season and if you have questions about whether you have the right coverages for you, reach out to us at MainStreetplanning.com and we would be happy to review your employee benefits with you as you decide what benefits are right for you this year.

The post 4 Things to Review During Open Enrollment appeared first on MainStreet Financial Planning.

What is a Custodial Roth IRA?
A Custodial Roth IRA allows a parent to open and manage a Roth IRA for a minor. The account is owned by the child, but the parent or guardian manages it until the child reaches the age of majority, typically 18 or 21, depending on the state. This account type is particularly beneficial for children who have earned income but may not have the knowledge or ability to manage their retirement savings yet.

Earned Income Requirement:
To contribute to a Custodial Roth IRA, your child must have earned income. This can come from traditional W-2 income sources, such as an after-school or summer job, or from self-employment, like babysitting or freelance work. The income must be verifiable, as this is a key requirement for opening and contributing to the account. There is no age requirement for opening a custodial Roth IRA so long as the child has earned income.

TIP: While there is an earned income requirement there is also an effective strategy where the parent can “gift” the child the full or partial amount of the contribution. This approach allows the child to enjoy their earnings while still contributing to their Roth IRA. For instance, if your child earns $3,000 from a babysitting job, you as the parent could contribute $3,000 on their behalf since they had $3000 in earned income and still allow the child to keep the earnings for them to use/spend. You could also consider contributing half of the earned income they had for the year ($1500) and then the child contributing the other $1500 while still allowing them to keep some of their hard earned money to spend while still making the child have some “skin in the game” so to speak.

Contribution Limits:
The contribution limit for a Custodial Roth IRA is the lesser of your child’s earned income or $7,000 per year (as of 2024). For example, if your child earns $5,000 in a year, that is the maximum amount they can contribute for that tax year. If they earn $8,000, they would still be limited to the $7,000 cap.

Time Advantage:
Starting a Custodial Roth IRA for your child maximizes the time their investments have to grow through compound interest. While any individual can open a Roth IRA at age 18, opening one even earlier enhances the time value of money and helps establish a habit of regular contributions. This early start not only amplifies the growth potential of their savings but also ingrains the discipline of consistent investing.

Withdrawal Rules:
The same rules that apply to a regular Roth IRA apply here. Contributions can be withdrawn at any time without penalty. However, withdrawing earnings before age 59½ may incur taxes and a 10% penalty, with certain exceptions such as first-time home purchases or education expenses. Importantly, the 5-year clock for tax-free withdrawals starts when the account is opened. This means that starting early allows the clock to start ticking sooner, making it possible to access funds for major life events like buying a house or paying for education with fewer penalties.

Long-Term Growth Potential:
Consistent contributions to a Custodial Roth IRA can result in substantial long-term growth. For example, if your child contributes $6,000 annually starting at age 10, they could potentially see their account grow to over a million dollars by retirement, thanks to the power of compound interest. Starting early not only increases the account’s value but also teaches the child the importance of regular saving and investing.

By opening a Custodial Roth IRA, you provide your child with a powerful financial tool and teach them the value of long-term planning. This early exposure to saving and investing sets the stage for a secure and prosperous adulthood.

*Source T Rowe Price 

A Custodial Roth IRA can be opened at most brokerage firms online—Vanguard, Fidelity, Schwab, etc. If you have questions about how to open and invest in a Custodial Roth IRA for your child, reach out to us, and we’d be happy to help guide you in setting your child up for success.

The post What is a Custodial Roth IRA and Should I Open One for my Child? appeared first on MainStreet Financial Planning.