Nov 21, 2022

Why You Should Open a Roth IRA for Your Kid ASAP

How would it feel to give your kids a huge head start on saving for retirement and teach them good money habits at the same time? Well you can! How? With a Roth IRA, of course. More in this blog.

College Savings Accounts to Get the Most Bang for the Buck

Why You Should Open a Roth IRA for Your Kid ASAP

How would it feel to give your kids a huge head start on saving for retirement and teach them good money habits at the same time? Well you can! How? With a Roth IRA!

First of all, a Roth IRA is a special type of retirement account that lets people get tax-free income when they retire. There are no age limits, so even a child can open a Roth IRA account and start saving for retirement and building wealth right away.

Read our full guide on Roth IRA’s here.

A custodial IRA allows the account holder (in this case, your child) to contribute after-tax dollars toward retirement. For the most part, a custodial Roth IRA operates in the same way as a regular Roth IRA.

The main difference between these two kinds of accounts is this: Since custodial Roth IRAs are for minors, a parent or another adult needs to be named as the custodian.

Before opening a Roth IRA for your child, there are a few things you should know. Even if you're going to make a Roth IRA contribution on your child's behalf, you must make sure they meet the requirements, know of all the benefits, and be aware of the steps involved in opening and funding the account.

Roth IRAs Explained (Everything YOU need to know about Roth Individual Retirement Accounts)

The Rules for Custodial Roth IRAs.

There are also rules that apply to accounts for children under the age of 18. This is what you need to know.


Your child needs to be working or bring in some other form of earned income in order to qualify for a custodial Roth IRA.  It makes no difference whether they are employed by someone else or engage in activities such as providing gardening services or being a lifeguard. As long as the child has earned income and has paid taxes on that income, they are eligible to contribute to a custodial Roth IRA.

Contribution limits of a Roth IRA 

The most you can contribute to your child's custodial Roth IRA for 2022 is $6,000 or, if less, the entirety of their earnings for that year. For instance, if your child earned $4,000 from employment, she might contribute up to $4,000 to her custodial Roth IRA this year.

Taxes with a Custodial Roth IRA

The money that is put into a custodial Roth IRA by your child is money on which the child has already paid taxes. They won't have to worry about paying income tax on the money when they take it out for retirement purposes (unlike traditional IRAs).

Converting to a Roth IRA

As long as your child is under 18, you will be in charge of everything in the account. But when he/she reaches the legal age in your state, which is usually 18 or 21, their custodial Roth IRA will need to be changed into a regular Roth IRA in their name. Make sure your child knows what's going on and how to keep adding money to their account before this happens!

When withdrawing from your Custodial Roth IRA

Your child shouldn't take money out of their account until they are old enough to retire because it is key to leave it there so that it can compound or grow. But if they decide to get some of their money out before then, they won't have to pay any fees for doing so. But they might have to pay taxes and penalties if they use the money before they retire.

The Benefits of a Custodial Roth IRA for Kids

Since you now know whether or not your children are eligible for a Roth IRA, you may be asking whether or not they should open one. A Roth IRA, in particular, can be a wonderful option for children to invest in for a number of reasons, in addition to the momentum that comes with starting to invest at a young age:

1. Having extra time allows for more compounding

Compound interest is when money that is invested earns additional money. Once we begin investing, the majority of us still have 30 or 40 years till retirement; a child who begins investing at a younger age will reap the benefits of considerably more. If your children keep their money in a Roth IRA until they reach retirement age, they may be able to look forward to fifty or more years of investment growth that is exempt from taxation. How cool is that?

2. Contributions can be withdrawn at any time

As mentioned before, many retirement accounts charge a 10% penalty if money is taken out before the account holder turns 591/2.  A Roth IRA is not the same. 

The money put into the account can be taken out at any time and used for anything. This flexibility is offset by stricter rules about how earnings, or the return on contributions that are invested, can be used in a Roth IRA. Distributions of investment earnings may be taxed as income, charged a 10% tax for being made too early, or both. The Roth IRA is a good compromise for kids who want easy access to their money and parents who want some of that money to be saved for the future.

3. Investing is better than just saving

The more conventional option for kids is a normal savings account because it is adaptable and doesn't require earning money, BUT that kind of growth wouldn't occur there. 

A Roth IRA gives your children the freedom to choose their own assets, which over time may result in the growth mentioned above. Instead, savings accounts offer an interest rate that is rather flat and now stands at roughly 0.09%. That's a far cry from the 6% or more 

you can anticipate making yearly from a long-term investment, not to mention many thousands of dollars. A one-time deposit of $6,000 won't even double after 60 years, not even at the 1% interest rate offered by many online savings accounts today.

4.The Roth IRA can be used for more than retirement

The best thing to do is to leave the money in the account and let it grow over time. But it's important to note that a Roth IRA isn't just a savings account for retirement.

Contributions can be taken out whenever and for whatever reason. But there are a few ways for your child to get the money from the investments before he or she turns 591/2. After five years of putting money into a Roth IRA, your child can take out up to $10,000 tax- and penalty-free to buy a first home.

Earnings from a Roth IRA can be used for qualified education costs, such as paying for college. Distributions of earnings will be taxed as income, but there won't be a penalty.

5. The BEST Tax Savings Account aka the Roth IRA

Because you don't get a tax break for putting money into a Roth IRA, you don't have to pay taxes when you take money out. If your child follows the rules for how the money should be given out, none of that growth is taxed.

When you have a long time horizon and your current tax rate is low, like it is for children, the Roth is a great way to save money on taxes. In reality, most children don't make enough money to pay much or any income tax, so they also don't pay taxes on their contributions.

What if my child doesn't qualify?

Earned income is one of the conditions, as was already mentioned. However, it does not follow that your child must hold a formal job. Income from a self-employed business is likewise acceptable as long as the IRS is informed.

For instance, if your 14-year-old child makes $1,000 this summer on a lemonade stand the income might be utilized to qualify for IRA contributions. Babysitting is an additional source of income that can qualify. 

One restriction is that your child can also be required to pay self-employment tax on his or her reported income if you use self-employment income as a basis for qualification. Even if this is the case, investing in a Roth IRA at a young age can more than make up for this cost in the long run. Additionally, the IRS states that your child must declare self-employment income if annual earnings exceed $400.

Wrapping Up

Custodial Roth IRAs are a terrific method to guarantee that your kids start out financially ahead of the game. Many adults learn about retirement planning too late, but by using a custodial account, you can start teaching your kids valuable investing skills right away.

If you're ready to take the next steps, speak with the advisors at Vincere Wealth to get started to BUILD your kid's wealth starting early! 

Note: You may need to serve as custodian of the account until your child turns 18, as brokerages generally don't allow minors to open their own accounts.

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