Roth IRAs for Kids: The Secret to Helping Your Child Build Wealth at a Young Age
As a parent, you’re always on the lookout for ways to make sure your child is set for the future. But have you ever thought about giving them a head start with a Roth IRA? Sounds kind of grown-up, right? Well, it’s actually a super smart way and powerful tool to boost their long-term financial security, and it’s easier than you might think!
Why a Roth IRA?
A Roth IRA isn’t just for retirees! It’s a special retirement account that offers tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, which means your child won’t owe taxes on the money when they withdraw it in retirement. This can be particularly advantageous for young investors who have decades to let their investments grow.
The Perks for Your Child
Now, let’s talk about the real magic: compound interest. Starting early means that even small contributions can grow significantly over time. Imagine this: your kid starts putting in $1,000 a year at age 15. With an average annual return of 7%, by the time they hit 65, they could be looking at over $200,000! Not bad, right?1
Another cool thing about a Roth IRA is flexibility. While the earnings need to stay put until retirement, the contributions can be taken out any time without penalties. So, whether it’s for college, a first home, or an emergency, those funds are there if needed.2
What’s the Catch?
Okay, there is one catch: your child has to have earned income. But that could be from babysitting, a part-time job, or even working in the family business. For 2024, the contribution limit is $7,000 or the total amount they earned—whichever is less.3
Is It the Right Move for Your Family?
While the benefits are clear, it’s important to consider whether a Roth IRA aligns with your family’s financial goals. Are you prepared to help your child understand the importance of saving and investing? Do you have the resources to match their contributions or help with investment decisions?
Opening a Roth IRA for your child can be a fantastic way to teach them about financial responsibility and set them up for a secure future. But is it the best option for your family’s unique situation?
What’s Next?
If you’re intrigued by the idea of opening a Roth IRA for your child but have questions about the specifics, such as investment options or tax implications, don’t hesitate to reach out – jennifer.jenkins@bluestonewp.com. Let’s chat about how this could be a smart step and discuss how to make the most of this opportunity for your child’s future.
**The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
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.
References
1 https://www.investopedia.com/open-roth-ira-with-your-child-5220429
2 https://www.nerdwallet.com/article/investing/why-your-kid-needs-a-roth-ira
3 https://www.forbes.com/advisor/investing/roth-ira-for-kids/
