Because of the wonderful Roth IRA benefits for kids, once my kids start to earn some income (aka get a job), I’m going to have them open a Roth IRA. A small problem is that currently my kids are ages 7 and 11, so I many have to come up with a clever way for them to earn some money!
Unfortunately, I can’t afford to put the maximum allowed ($5,000 each) in both of their future Roth IRA accounts, at least without severely affecting the growth of my own net worth. So instead, I intend to put one or two thousand in each of their accounts per year. Of course, it depends on my own future income stream.
What Are Some Roth IRA Benefits For Kids?
- Money that is added to a Roth IRA will grow tax-free!
- Money that is contributed to a Roth IRA can be taken out any time both tax and penalty free. Note, the earnings on the contributed money cannot be taken out without a incurring a 10% penalty and income tax on the earnings.
- If you put the money in stocks that yield dividends, the dividends also will be tax free!
- You can contributed the money from your account, but that amount you add need to be what they earned or less for that given year.
- You can take $10,000 of earning out for purchasing a home if you are a first time home buyer and qualify under certain rules!
The benefits listed above are powerful reasons to consider creating a Roth IRA for kids, but the real hidden advantage is that contributing to a Roth IRA starts a family tradition and habit for your kids! If have your child go though the process with you every year, hopefully they will learn that the contribution process is just a normal, annual activity! This can be a powerful tool for wealth creation for them. Hopefully they will realize that you are paying into their Roth IRA for they retirement someday, so hopefully they will think twice before withdrawing it.
While you can use the Roth IRA for college expenses too, I prefer not to do this since the earning will be taxes (although the 10% penalty is waived for such expenses). That said, they can still use the contributions from the Roth IRA tax and penalty free (but then again they can use the contributions for anything tax and penalty free). Personally, I prefer to use a 529 plan. The 529 vs Roth IRA route to save for college really depends on how much you make and is a topic that I’ll blog about in the future.
Another non-financial benefit is that this give your child exposure to stocks and other investments. Is there a better way to learn about investments other than getting your hands dirty doing it? I think this could be a great learning tool for them.
Well, you now know the benefits of a Roth IRA for kids! If you have any question please leave them in the comment section below or email me (via my contact page).
Wishing you the best,