The Ultimate Guide to a Roth IRA for Kids

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We all know that saving for retirement is important.

It is also something that is hard to do, especially the more kids you have and the more responsibilities you have.

Since you know how hard it can be you should consider giving your child a leg up on retirement.

How? With a Roth IRA for your child.

Yes, your child can have a Roth, and the sooner you start saving the easier they will get to retirement.

What Is a Roth

A Roth is a type of retirement savings account. You put in money after tax and then the money can grow and be withdrawn with no future tax implications.

In other words, pay taxes on what goes in and no taxes from that point on!

As of 2015, you can contribute up to $5,500 or your income level (whichever is higher) if you are under 50.

For more specifics on the Roth IRA.

Why Is This Good for Kids

This is great for kids because they have time on their side.  Not only do they have a long time for compounding to kick in, they get the benefit of that growth never being taxed.

Just to give you an idea if you just max your child's account out one time — just one time — that $5,500 invested for 45 years earning eight percent a year will become just at $175,000. So a 16-year-old today at the age of sixty-one will have $175,000. Just imagine what this could be if your child maxed it out twice, or three times or four times?

The Hurdles to a Kids IRA's

There are some hurdles you must first overcome to make your child eligible for the Roth.

First, they must have earned income. No gift money, not investment income, but actual earned income with a tax return filed.

While this might seem like it eliminates all kids below working age, there are ways that kids can earn money without being sixteen.

  • Family Business — if you or a family member owns a business they can work for the business.  This can be something like filing or it can even be modeling for any advertising that the company does, so even your adorable toddler could open a Roth!
  • Modeling/Acting — even if your family does not own a business, many kids earn money as models or actors. Just don't fall into the scam of constantly buying pictures and classes! Make sure you are making money on it.
  • Start their own business — kids can start their own business and use that as income to open an IRA. In fact, they are supposed to file a tax return with as little as $400 in revenues from a business, so they can quickly start saving in a Roth.

Another hurdle you will have to face is that not all brokerage houses offer kids Roth IRAs. In fact, you might even confuse a customer service person if you call and ask for one since they are not all that common. Still, call anyway and have the person ask their supervisor!

You will open the account with both of you on it, but you are the guardian.

While many do offer them a Charles Schwab, makes it easy with a page dedicated to it.

Final Notes:

You can fund the IRA for them, but they must still have income.

I would also recommend you don't do this until you have fully funded your own retirement.

If they have income, you have a funded retirement and have extra money then you may consider letting them spend the money and you contributing or you may match.

For example, if they earn $4,000 and they put in $2,000 you will also put in $2,000. Thus they learn to save, fully fund the account but still have spending money.

Why not a regular IRA? Kids typically don't need the tax deduction. It would be better for them to have the tax-free growth than the deduction now.

A side benefit is that the money in the account will not impact federal financial aid as it is a retirement account, only if you take out money from the account is it considered taxable income.

Don't delay get your child a head start on retirement savings!