If you’ve reached or are reaching retirement, you’re probably in one of two circumstances. You’ve either planned for retirement and are secure, or you’ve put planning off and are in a panic. Everyone told you to start early, but just how early?
It’s said that you’re never too young to start planning, and this could mean beginning as a minor. As long as a minor makes an income, they can start saving for retirement with a Roth IRA. This can help them feel secure 50 years down the road. But how does this work for a child, and is it worth it?
Kids’ Monies Grow With Roth IRA
Although traditionally Roth IRAs have been retirement vehicles for adults, a child can use a Roth IRA for retirement savings as well. It works out for them because of their youth. Children can have decades of tax-free growth and few worries about retirement. Another advantage of starting this early is aggressive investing. They don’t need to sit in a low-risk balanced fund.This savings vehicle isn’t just for retirement. A Roth IRA can potentially be used for a first-time home purchase or higher education.
This is wealth building. And it’s an opportunity to teach personal finance and investing to minors.
Qualifications for a Minor’s Roth IRA
Although there is no minimum age to qualify for a Roth IRA, the child must have “earned income” to contribute. According to the Internal Revenue Service, earned income is taxable income and wages “you get from working for someone else, yourself, or from a business or farm you own.” For example, your teen’s babysitting job would be considered earned income.Taxable assets aren’t typically an issue with a minor since they don’t usually earn enough to pay much, if anything, in tax.
Setting Up a Child’s Roth IRA
A parent or other adult needs to set up a custodial Roth IRA for a minor. The adult will also have to manage it. It’s a simple process; you'll need the Social Security numbers of both you and the child. You’ll also need your child’s birthdate. There isn’t a minimum dollar amount to open an account.You can use an online broker or discuss this with your financial advisor.
How Roth IRA Contributions Are Made
The Roth IRA contribution limit for 49 or younger is $6,000, or the total earned income in a year, depending on which is less. So, if your child makes $1,500 a year walking dogs, that’s the most she can contribute. In other words, a child can contribute only up to the most they earn, with a maximum of $6,000 a year. So if they make $7,000 a year, for example, they can only contribute $6,000.A child might balk at giving away all their dog walking money. After all, most children aren’t into long-term planning. Delayed gratification isn’t a child’s forte. That’s where a prudent parent or grandparent comes in. Have the child put half their money in the Roth IRA and the parent or grandparent matches the rest up to the $1,500 total earned from the dog walking. Just make sure that your child keeps a log of their earned income. If they made $1,500, write it down.
Withdrawal Rules for Roth IRAs
A Roth IRA is more flexible than most retirement accounts. Although contributions are not tax-deductible, the earnings can grow tax-free. And qualified withdrawals are penalty-free and tax-free.For instance, you can withdraw up to a $ 10,000 lifetime maximum for a first-time home purchase. The withdrawal is tax-free. Funds from a Roth IRA can be used for higher education expenses, penalty and tax-free.
Other withdrawals can be made if the account has been open for five years or more. But you may have some tax ramifications on the Roth IRA earnings if you are not older than 59½.
Educating Minors on Personal Finance
There’s a difference between saving money and investing it. Most children think they are making money if they put their hard-earned cash in the bank. They likely don’t know that it’s more like storing money than having it grow. A Roth IRA helps a child learn sound personal finance by teaching them the difference between saving and investing.The Roth IRA lets children pick investments. It allows them to research and plan their financial future. There is a downside, though, that a bank doesn’t have, and that’s the potential to lose an investment. That’s why it’s essential to teach them to diversify their portfolio.
One way to help teach a child about investing is to have them sit in with you and your financial advisor.
Investing in Retirement When Young
With future Social Security benefit perennially in doubt, today’s youth need to plan for their retirement early. It’s not too soon for a child to start investing in their future. A Roth IRA is a vehicle that allows a child, with the help of their parents, to take earned income and make it work for them.That dog walking or babysitting money could fund a retirement 50 years later.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
