Why Roth IRAs Offer Great Tax Advantages For Your Kids, If you Abide By The Rules

Roth IRA

A Roth IRA has the potential to benefit people of all ages, even children. The problem is kids are not eligible to open and run their own Roth IRA until they become 18+ years old.

To work around this age restriction, parents have the opportunity to open a Roth IRA for kids that they can manage until their child is legally of age to take over their own account. It’s important to note, these accounts aren’t the right choice for everyone, but there are pros that can make opening a Roth IRA for your child a smart move.

One big pro of Roth IRA, is contributions aren’t tax deductible. Rather, Roth IRA’s are funded with after-tax contributions that can be withdrawn without the risk of penalties and income taxes at any time. Also with Roth IRA’s, the earnings on contributions grow tax-free and earnings can be taken out tax and penalty free if you follow these rules:

  • The account owner must be at least 59 ½ years of age.
  • The Roth IRA has to be open for a minimum of 5 years.

In reference to a Roth IRA for kids, it’s what we call a custodial account that offers the same benefits of contribution and withdrawal as a traditional Roth IRA.

If you wanted to open up a Roth IRA for you child, your child will need to have earned some form of income from work, like a part-time job working at the grocery store or dog sitting. Just like a normal Roth IRA, contributions can’t surpass the child’s earned income or the annual contribution limit.

After you’ve opened the account, you’ll be responsible for managing your child’s account until they become of age that they manage it themselves. It’s key to remember that any money that is put into the Roth IRA for kids now belongs to the child. You have no authority to take that money back, no matter the circumstances.

A Roth IRA’s top benefit is that its tax-free, compound growth, or having the chance to earn returns not only on your contributions but also on previous gains. This happens because returns are measured on all previous contributions and returns, each additional year an account is open can turn into significantly more money.

For example, if your son Zachary takes control of his Roth IRA for kids at the legal age, he continues to input $50 per month until the age of 65, and he earns an average 6% yearly return, then his $30,500 in contributions would increase to $183,411.62 due to compounding.

In closing, a Roth IRA for your kids can be a great way to teach them about investing, and it can give your kid a huge head start in the race to financial freedom, specifically if the account can help them buy a first-home that otherwise, they couldn’t afford.

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