Savings accounts are popular among kids, but giving them access to a Roth IRA (individual retirement account) could be the ultimate wealth builder. Anyone can contribute to a Roth IRA — regardless of age — as long as they have enough earned income to cover their annual contributions.
If you're wondering if opening a Roth IRA for a child is a good move to make in 2023, here are a few things to consider.
Unwrap the benefits of a Roth IRA
A Roth IRA is a special retirement account that is loaded with benefits. Some of the perks include:
- Receive tax-free income during retirement.
- Watch your investments grow tax-free.
- Invest in a diverse range of assets.
- Avoid required minimum distributions (RMDs).
The best part is that the Roth IRA does not come with age restrictions. That means you can open a Roth IRA for your 3-year-old daughter who lands modeling gigs every month. It's never too early to think about a Roth IRA and how your current contributions can compound over time.
For 2023, you can contribute up to $6,500 to a Roth IRA on behalf of a minor. If your child only earned $3,000 in 2023, your child's contribution limit is capped at $3,000.
Let's say your child is 11 years old. If your child is able to contribute the maximum amount (assuming $6,500) for six years, your child will have $39,000 stashed away in the account before they turn 18. This money can be invested in assets that can supercharge your child's portfolio and get them closer to a million-dollar Roth IRA before retirement.
A few questions to consider
A Roth IRA is an attractive retirement account that's too good to pass up. But before you open an account for your child, here are a few questions to consider:
- Does your child have earned income?
- Do you have proof that your child earned income in 2023?
- Where do you want to open a Roth IRA for your child?
- Does your current financial institution allow you to open a Roth IRA for your child?
- Do you have the information needed to open an account?
- Does your child meet the income requirements?
How a custodial Roth IRA works
Let's say your child is 11 years old and earns money as a babysitter. You or another adult can open a custodial Roth IRA at a financial institution that offers accounts for minors.
Here's what you should know about a custodial Roth IRA:
- Any adult can open a Roth IRA on behalf of a child that has earned income. This can include a parent, grandparent, uncle, or other adult.
- If your child is a minor, they will be listed as the account beneficiary.
- An adult will be designated as the account custodian and will manage the account until the child is eligible to take control of the account (age 18 in most states).
- You can contribute money to the Roth IRA on behalf of your child, or they can use their own money to contribute to the account.
If your child has skin in the game, it's more likely they will continue making contributions to the account once they become an adult. On top of that, opening a custodial Roth IRA can teach your child about the power of time, consistency, and investing. When your child reaches 59 1/2, all the money accumulated in the account will be 100% tax-free. Even if your child's Roth IRA grows over $1 million, they still won't have to worry about taxes.
A Roth IRA can help your child build wealth
Since Roth IRAs don't come with age restrictions, you can get your child started on the path to financial success as soon as they start earning income.
Time is the most valuable asset that a child has at their disposal. If you open a custodial Roth IRA for your child, they can take advantage of decades of compounding. The earlier you can get your child started, the more money they can accumulate in their account. Opening a Roth IRA is a surefire way to help your child get closer to millionaire status before retirement.
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