3 Important Things You Should Know When Opening A Roth IRA For Your Child
Did you know that you're never too young to start investing in a Roth IRA? In fact, it's one of the best methods that you can use to provide your child with a head start in his or her financial life. Although Roth IRA's may not fit everyone's investment needs, you may very well be amazed to learn exactly how valuable the investment strategy may be for your family. In essence, a Roth IRA can help your child start saving money now no matter how old they are. At this point, you may have a few questions.
For example, what exactly is a kid's Roth IRA, how much money can you contribute, and what are the benefits to investing in this valuable long-term investment tool? The following information will answer all of these questions for you.
- What Exactly is A Child's Roth IRA?
The answer to this question is simple. In essence, a Child's Roth IRA is similar to any standard Roth IRA except you are the acting custodian to the account. This is due to the fact that your child is a minor and cannot open or manage his or her own account. That being stated, as long as your child meets the eligibility requirements, you can open an ROTH IRA on their behalf and contribute to it as well. Once your child reaches eighteen years of age they can take over the management of their account.
The bottom line is that their money will grow on a tax-free basis just like any other Roth IRA account. Your child will have the ability to withdraw from their account on a penalty free basis once they reach the age of 59 ½. Your child may also be able to withdraw contributions, not earnings, at any time without paying a penalty.
- How Much Money Can Your Child Invest In Their Roth IRA?
A basic requirement for opening a Roth IRA on behalf of your child is that your child must have an earned income. That means you need to ensure that you child is actually making money prior to moving ahead. They can earn money by having a job, or through other work related activities such as babysitting, pet sitting, or doing yard work. You can even open a Roth IRA for your baby as long as he or she is earning income. Although this may sound silly, there are babies that get paid for modeling or appearing in commercials.
As of now the contribution limit is $6,000, or 100% of earned income, whichever is less. That means if your child earns $1,500 per year, they can only invest $1,500 into their Roth IRA. Although that may sound like a small amount of money to invest, it adds up in a significant manner over time due to the compounding returns of the investment.
- What Are The Benefits Of A Child's Roth IRA?
Perhaps the most important benefit of opening a Roth IRA for your child is the fact that he or she will be able to benefit from long-term, tax-free growth. Typically speaking, your child won't earn enough money to pay federal income taxes based on their low-income level. Although contributions are made to Roth IRA accounts with after-tax money that simply doesn't apply to your child because he or she doesn't pay taxes. In essence, a Roth IRA provides your child with a method to take advantage of tax-efficient compounding returns over the long haul, and in a perfectly legal manner.
There are additional benefits as well. For example, if the Roth IRA account has been funded for a minimum of five (5) years, your child may be able to withdraw as much as $10,000 including earnings in order to purchase their first home.
In conclusion, opening and managing a Child's Roth IRA is an important piece of the puzzle when it comes to ensuring the success of your child's financial future. In fact, the sooner you do it the better off they will be. It's also important for you to follow the rules and ensure that your child can show a legitimate amount of earned income.