As parents, it’s natural we want to help our children save for their futures and build financial literacy. Finding ways to help them save money now in ways that are not only tax-efficient but will grow throughout their lifetime is a generous, strategic and life changing gift to give a child.
But how do we do that?
Roth IRAs, when opened for minors, can be a great tool to get a headstart on wealth building. Basically, you’re putting money away that is going to grow tax free and be available for non-taxed withdrawals when your child turns 59 ½. Sure, that’s a long time away. But when it comes to building wealth, time is truly the best tool there is.
Can anyone do it?
Not everyone, but almost any child with a job can qualify.
The money that gets put into this account needs to be based on earned income, so you can’t simply be gifting money to your child and putting it into a Roth IRA. But, if your kid has a summer job mowing lawns, babysitting, or bagging groceries, that counts as earned income.
Say they make $2,000 over the summer with that job. You can encourage them to put that money into the account, or you can take any amount of your own money up to that $2,000 and put it into their account yourself.
Because of the earned income requirement, you probably can’t get away with opening these accounts for a toddler, but you can for a teenager.
How do I open the account?
Roth IRAs can be opened for minors, but they’ll need to be custodial accounts meaning they’re in your name rather than your child’s. To open one, you just need to go to any major brokerage firm or financial institution and fill out an application.
Opening this account is a great way to start teaching the importance of saving and the value of a dollar. In addition, it’s a huge opportunity for gifting, intergenerational wealth transfer and tax planning.
Teaching your child how to save money from a young age will set them on a path to success in the future.
A Roth IRA will give them the chance to grow savings over possibly 50 years in a way that is free from all future income taxation.
For more smart tax moves, I’ve made my e-book, Pay Less Taxes Now, available for free download at www.lowtaxbook.com.
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 with regards to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.
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