Tuesday, October 19, 2010

Retirement Plans for Teens

Since Sophie is self-employed and just turned 19-years-old we've started to look into retirement plans for her. Since she lives at home, she can put money away that she would otherwise need for bills.

Her goals are to:
1. Never retire as she plans on acting forever but to be able to retire at 70-years-old.
2. Have a million dollars saved by the time she's 70-years-old.
3. She's planning for a life-expectancy of 95 years.

So the questions are:
1. Which retirement plan is best suited for her needs and goals?
2. How does she want to invest? Stocks? Funds? Aggressively? Conservatively?
3. Does a 401K or IRA plan better suit her goals?
4. Does she want to pay her taxes now or when she withdraws the funds?

Retirement Plans for Teens
It seems like everyday we find a different plan that seems to best suit her needs.

Today, I was sure the Self-Employment 401K (also known as the Solo 401K or the Individual 401K) seemed perfect. She could sock away $16,500 annually and up to a total of $49,000 annually (as of 2010)... if she could. Taxes are deferred. This is probably the most lucrative tax shelter plan on the market and only available to self-employed individuals with no employees.

We discussed it. She felt it was a good fit.

Next was the task of finding the right company or brokerage firm.
1. Vanguard charges maintenance fees unless there is at least $50K in at least one of the owners accounts. She doesn't qualify.
2. Sharebuilders only allows you to purchase funds (no stock purchases allowed) and charges a set up fee of something like $165.00.
3. Fidelity allows for the purchase of funds or stocks with no set up fee, annual fee or monthly fees. The cost to the client is the cost of each transaction which is $8 per buy.

We decided to go with Fidelity. I drove over to Tampa, picked up the booklet and began to fill out the forms.

Planning for an early retirement
Apparently, you must agree upfront to deposit a specific amount into the account each year. We do not know at this time how much she wants to invest. Now we're stumped. Maybe we should buy stocks through Sharebuilders and move it mid December. At that point we could determine the total contribution amount which doesn't need to be deposited in full until April 15, 2011 unless she gets an extension. Don't know. It's food for thought at the moment.

One of the nice things about a Self-Employment 401K is the leeway one has when it comes to purchases. She could buy a house within the plan. That being said, if she were to do that she would lose the annual tax write-offs. Nonetheless, the flexibility is nice.

The bottom line is to save for her future. Her goals are extremely reasonable. She'll have a hard time not reaching them if she diligently saves, especially this early in the game.

Sophie has agreed to put 15% of her earnings into long term savings. This will allow her to save for other things as well and not make her feel like her savings goals are strangling her lifestyle.

These goals will also allow her to flail about as an actress without having to worry about her future - if need be. Hopefully, this won't be a concern but if it is it will be reassuring that her future is taken care of.

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