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actually be withdrawn at any time without the penalties and taxes that are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Contributions Can Be Withdrawn At Any Time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 For example, if the account earns $500 in interest, and that $500 is withdrawn, the $500 becomes taxable as income.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.
If you would like to receive more information on making smart money moves for your future, be sure to contact us today!
