Opening a Roth IRA for your kids is a smart move once they start earning their own money. It’s not just a way to build wealth; if you own a business, it can also save you on taxes.
Imagine your child having over $100,000 or even $1 million by the time they’re legally an adult. The financial freedom and pride that comes with this are enormous. Starting young with contributions to a Roth IRA could lead to your child’s account reaching these amounts thanks to the power of compound interest.
The Roth IRA, established by the Taxpayer Relief Act of 1997 and named after Senator William Roth, is an investment vehicle where contributions are made with after-tax dollars, allowing earnings to grow tax-free. You can withdraw your contributions anytime without penalties or taxes, but early withdrawals on earnings could incur penalties and taxes unless used for specific purposes like buying a first home or paying for education.
Regretfully, I missed out on contributing to my Roth IRA during my college years and early career due to income limits. At the time, I was more concerned with securing and maintaining my job rather than planning for retirement. This highlights the importance of financial education and parental guidance in understanding and utilizing powerful financial tools like the Roth IRA.
Opening a custodial Roth IRA for your child encourages savings habits, builds their work ethic since it requires earned income, and teaches them about investing and taxes while growing their retirement nest egg. Money in a Roth IRA can be withdrawn for various reasons, making it a versatile tool for future financial needs like buying a car or traveling.
To set up a Roth IRA for your child, you must ensure they have earned income. This can come from a W-2 job or self-employment activities like babysitting or modeling. It’s crucial that the income comes from genuine work, ideally outside the family, to maximize the benefits and adhere to IRS guidelines.
The contribution limits for a Roth IRA in 2024 are $7,000 or the total of the child’s earned income, whichever is less. Opening an account is straightforward and can be done through major brokerage firms.
Opening a Roth IRA for your child not only sets them up for financial independence but also teaches valuable lessons in money management and investing. With early and educated investment, your child could significantly advance their financial freedom, giving them a substantial advantage in their adult life.
