Updated: Jun 10, 2020
"If I'd have had more time, I'd have written a shorter letter" ~Blaise Pascal
This note is excerpted and edited from an article by the web service
Nerdwallet. The complete article can be found here.
Roth IRAs are a great retirement tool, particularly in the post SECURE Act
world. They are extra powerful for children who don’t have a lot of taxable
income today (as they don’t provide a current income deduction; however, the
growth in these accounts is never taxed, assuming the child waits until
retirement age to withdraw the funds (currently defined as 59 ½). That is an
awful lot of tax –free compounding for a young person!
There are no age restrictions. Kids of any age can contribute to a minor Roth IRA if they are under 18. NOTE: Various custodial firms do have different rules regarding availability and age, so check with your advisor.
A parent or adult will need to open the account for the child.
The child must have earned income. This may be earned from a W-2 job, or from self-employment such as babysitting, yard work, etc.
The child can contribute each year to the Roth up to 100% of their earned income or $6,000 annually, whichever is less.
Why a Roth:
In most cases, the child's overall income tax bracket is not high enough to benefit from the deductibility of the pre-tax contribution.
Roth's work best when your current tax bracket is low and your time horizon is long, making them an excellent option for kids.
Roth IRAs offer several other withdrawal options, which may prove valuable over the course of the investment period. Consult your advisor for details.
In looking at a young person with a time horizon of say, 50 years until retirement
(keeping in mind that life spans and typical retirement ages are widely expected to
increase over that time frame), saving a couple of thousand dollars starting at age 15,
saving $100/month, and compounding at a reasonable rate of return, your child’s
investment could grow to… I don’t even want to say. I’m sure my Compliance
Department would have a heart attack if I started projecting returns in here.
However, if you’re interested to play with possibilities yourself, try exploring the
compound interest calculator at Investor.gov, a service of the U.S. Securities and
Exchange Commission, found here.
IN SHORT, Minor Roth IRAs are a powerful tool for your child to start learning
financial responsibility and to get them planning for their own personal financial
success. Contact your advisor to get started today!
Make it a Great Day!