Opening a Roth IRA for your child is a great way to put them on a path toward a financially stable future. But it’s not as simple as opening a basic savings account.
Before you go to the bank, here is what I think you should know:
What’s a Roth IRA?
A Roth IRA is a unique retirement savings account that allows after-tax dollars to be deposited and grow without tax. Moreover, for the entire lifetime, the funds from the account can also be withdrawn without tax. This means that if you open a Roth IRA for your child when they are young, they can enjoy tax-free growth for decades to come.
Opening a Roth IRA for any child under the age of majority means you’re opening a custodial Roth. Some custodians won’t do custodial Roths, and others will, so you need to check with your financial advisor or your bank or your institution where you do your investing and find out whether they will open that type of account. And then once your child reaches the age of majority, they’ll take that account over.
What’s the fine print?
Not every minor will be able to take advantage of this strategy. The child needs to have legitimate, W2 income to open the account and be eligible for a custodial Roth. So, you can’t open a Roth IRA for a seven-year-old and claim he is on your payroll.
But when your child is old enough to earn money through a legitimate job and will be filing a tax return, they become eligible for a Roth IRA.
How can I help them save?
While a legitimate income must be proven, there is no rule about the money being contributed to IRA coming directly from the child. If you have the wherewithal to do so, you can let your kid keep his or her earnings and contribute your own money to their Roth IRA if it is within the contribution limits.
The lesson:
Opening a Roth IRA for your child is an excellent opportunity that can set them up for a secure financial future. Whether it’s through legitimate income or gifted contributions, starting a Roth IRA when they’re young can make a massive difference in their financial well-being.
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.
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. Brotman Financial Group, Inc. and BFG Financial Advisors are not affiliated with Kestra IS or Kestra AS.
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