As parents, we have a responsibility to teach our children how to save, spend, and invest wisely. Trying to explain these principles, in theory, can be difficult for a parent to communicate as well as for a child to understand. However, a Kid’s Roth IRA can give a parent an opportunity to provide a child with real-world investing experience. It also has the potential to provide a head start to their financial future.
There is no minimum age requirement to make an IRA contribution. The only requirement for a minor child to be eligible to contribute to an IRA (either Roth or Traditional) is that child must have earned income. Earned income, as defined by the IRS, is “all the taxable income and wages you receive from working.” Consider that paying your child or grandchild for chores or other duties can help a young person develop a work ethic as well as showing them how to save a portion of what they earn. We believe these are some of the foundational principals for achieving financial strength.
A Roth IRA is funded with after-tax dollars, meaning there is no current deferment of income taxes. However, once deposited into the Roth IRA, funds grow tax-free and if qualified, can be withdrawn tax-free. Roth IRA funds can potentially be withdrawn early and without penalty (of course, subject to IRS regulations). Therefore, some parents like to consider these for future educational expenses, as well.
Finally, unlike a traditional IRA, Roth IRAs are not subject to Required Minimum Distributions, so the funds can potentially grow tax-free for the entire lifetime of the child.
A benefit to the child is that they may be able to get tax-free growth on their investments while being able to invest in a wide array of investment vehicles such as mutual funds, stocks, and ETFs. The Roth IRA can also be beneficial to someone who is currently in a lower income tax bracket (like a child) and expects to be in a higher tax bracket at the time of taking withdrawals.
We believe a Roth IRA can be an opportunity for young people to build their future with their parent’s guidance. The benefits of starting to save money earlier in life, learning to invest, and getting the real-world experience of being financially responsible are core life lessons. The Roth IRA can be a vehicle that helps a child take a step towards financial responsibility. The IRS rules can change over time, and working with a tax advisor can help you avoid mistakes. Working with a Registered Investment Advisor can help you make an informed decision regarding the benefits, risks, and costs of these types of accounts. If you are curious about this or want to learn more, please ask us!
Shadowridge Asset Management, LLC does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor.