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,
MR
It is hard for youngsters to earn money. What if you had them put half of all allowances, gift money, etc into a Roth IRA? You can also pay them for a lot of chores you might hate, like raking leaves, sweeping the garage, weeding, etc. Set up an ‘earnings chart’ for things outside of allowance, and then them earn away. It won’t be much money, but it might get them in a working habit, and your yard will look better!
I was thinking about seeing if a neighbor would hire my son to mow his lawn, and I would hire his son to do my lawn, then both kids would have money from non-family members.
I don’t feel comfortable claiming what I pay him…
I’m most definitely going to do this when jr is old enough! I would suggest to file taxes though (jr. won’t owe IRS anything, but it is good to file for records).
This is probably the best gift a parent can give their kids!
Unfortunately, I’ve had to file taxes for them these past few years already because of high portfolio turnover.
You could start it when they are born with gift money and add a long the way. Most children want to buy a car at 16 and they could use a portion of the money for that car. It would certainly motivate them to save.
Yeah, That would have been a great idea, I wish I had stated that fund for a car. I do think about buying my son a car in the near future. I’m not sure how I’m going to wing it along with insurance…
I am a big fan of this. This would be a special gift to one day give your child on the day of high school graduation or college graduation. It would also help them with the expenses of college because I know I won’t be paying for their college. They will have to go it alone–I had to and I got out unscathed.
Yep, that would be idea! I’m pretty sure I’m going to do it if I can afford to do it. And obiously, I have to figure out a way for them to earn some income.
I’ll be doing this for the boy too once he starts earning some money. It might be a while though because he’s only 5 months old.
Yep, the only way a baby or toddler can make any money is by being a baby/toddler model (but that’s not easy)…
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My 3 kids are already in college and working. Can I make a direct contribution to their Roth accounts (to avoid them being tempted to spend it on other things)? If not, do I have to “gift” it to them and trust them to put it into the Roth accounts? I understand the amount would have to be within the $5,000 limit AND dependent upon what they earned from their regular jobs AND what they may have already contributed for this tax year.
I can only speak from my perspective, so here what I would do.
First, I plan on helping them setup the Roth IRA (account application wise). Next I would gift them the amount up to the limit ($5,000, or the Roth IRA limit up to the point that their isn’t any tax on that amount) or what I could afford to give them ($2,000 each).
Next I would tell them that I want to see the receipt (via showing me physically or email a scanned image of it). I gave them that money and I want to know!
Now the problem is that if they want to turn around and withdraw the money since it’s a contribution, they can do so without a tax or a penalty.
So it’s a tough balance… If I thought that my kids might withdrawal the contribution, I wouldn’t put the money into their accounts then.