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The Benefits of Opening a Roth IRA Account for Your Kids

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October 11, 2020

The Benefits Of Opening A Roth IRA Account For Your Kids

Did you know that a Roth IRA is the perfect long term investment tool for your child due to the fact that young people have a great deal of years for their contributions to grow in a tax free manner? In addition, these investment accounts are incredibly flexible. For example, contributions to a Roth IRA can actually be withdrawn at any time without the penalties and taxes that are associated with most of the other long-term investment vehicles. That is just the start. The following information will provide you with even more details about the benefits of opening a ROTH IRA account for your kids.

Contributions Can Be Withdrawn At Any Time

As mentioned above, when you open a Roth IRA account for your child, your child can actually withdraw from it at any time that he or she needs to. That means they can withdraw the funds to pay towards college or purchase items that they need or want. However, Roth IRA's have harsher rules regarding the earnings/return on investment. For example, if the account earns $500 in interest, and that $500 is withdrawn, the $500 becomes taxable as income. In addition, your child will also need to pay a 10% early withdrawal penalty. Between the tax and the penalty, it makes more sense to leave the account's earnings in place for the long haul.

Investing Early Equals A Larger Roth IRA Account

Investment accounts grow over time due to compound interest. That means if you start a Roth IRA for your 15 year old, the account will have more time to grow than if you open it when your child turns 25 years old. Those ten (10) years can make a significant difference to your child when he or she retires, especially if they do not withdraw money from the account over the years.

Investing Money Is Better Than Saving Money

Did you know that your money or in this case your child's money grows at a significantly faster rate in a Roth IRA account when compared to a typical savings account? Although most people open a savings account for the children, they will be far better off if you open an investment account instead. However, any money that is deposited must be considered earned income. So if your child opens a lemonade stand, deposit that money in a Roth IRA instead of a savings account.

Your Child Can Use The Money Before Retirement

Although a Roth IRA is technically a retirement account, and the main goal should always be to build for your child's retirement, the money can be used for other things during their life. For example, once the Roth IRA has been funded for a minimum of five (5) years, your child can withdraw up to $10,000 tax and penalty free to purchase their first home.

The Tax Advantages Are Perfect For Children

Since there are no tax breaks for depositing money into the Roth IRA account, the distributions in retirement are actually tax free. That means the account may grow to a substantial sum over the years and all of that money can be tax free when your child retires and most likely needs the money the most. In fact, children, especially younger children have earnings that are so low that the income is taxed very little if at all. For example, if your child earns $50 with their lemonade stand, that income will not be taxed. However, that $50 will grow tremendously in the Roth IRA account over a 50-year period. When that money is withdrawn at retirement, it won't be taxed as well.

In conclusion, a Roth IRA can be an excellent long-term investment vehicle for your child. It should be set up at a young age in order for him or her to take full advantage of the many benefits that are associated with it.

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About the author

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Mark Scribner

Managing Director, Boston

Mark F. Scribner is the Managing Director of oXYGen Financial, Boston Office. Mark grew up in Melrose, MA and now lives in Boston. He has an amazing wife Michelle, who supports all of his crazy endurance endeavors, including a solo attempt to swim the English Channel! Mark is the father of four children - Mark, Bella, Olivia and Emma. He loves being an assistant NFL photographer and cancer fundraiser, along with creating and running various companies.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation.

Background and qualification information is available at FINRA's BrokerCheck website.

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

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