Starting a retirement account for your child might sound funny. You might even wonder how it is possible. Well, if your child has some income, you can easily open a Roth retirement account for them. And later in life, this money can become significant financial support for them.
There are two good reasons for considering a Roth retirement account. Firstly, you can open it for a child of any age as long as they have any earned income.
Secondly, the account gets a considerable stretch of time to grow the money (tax-free at 7-10% annual return). Plus, you can make rewarding investments with the money that are risky in the short term.
Are you wondering if your child is too young to open an account? Well, children as young as twelve can open a Roth account. And in the future, it can help them with education loans, health emergencies, and others.
Learn more about a Roth retirement account’s mechanism, requirements, and advantages.
How A Roth I.R.A Works: A Roth account differs from a traditional Individual Retirement Account. In a Roth account, the money can grow tax-free, and the holder can also withdraw it tax-free. Plus, you can also make investments with the money in your account.
There is no minimum age for opening a Roth I.R.A. However, there is a limit to the contribution. You can’t deposit more than 6000$ a year to your Roth account when you are under 50.
Qualifications of Account Opening: The qualification for opening a Roth account is simple- the child needs to have earned income.
For instance, earnings from working at retail stores, swimming pools, or part-time waiting in restaurants are easily eligible. Jobs like mowing a neighbor’s lawn, shoveling snow from the driveway, or babysitting are also valid.
The main idea is that the job has to be genuine and legitimate. So, if your child earns money from you doing chores around the house, it is acceptable too. But the task has to be something for which you would have otherwise hired outside help.
Contributing on your child’s behalf: Young children are less likely to care about a long-term retirement goal. Naturally, they would like to spend their income on short-term pleasures. So, if you can’t convince your child to give up their income, you can deposit the exact amount on their behalf.
Here, the only condition is that your contribution has to match the child’s income. So, you can deposit 500$ in your child’s Roth account only if they earned that over the set period.
Keeping Documents: In all cases, keep the relevant documents (like paychecks from the employer) for future audit requirements. And if the child had made the income from self-employment, then maintain a detailed logbook of those activities.
Another smart move is to have your child file for an income tax return. You can do this even if the child’s income does not meet the federal filing threshold.
Withdrawal of Funds: The account holder can withdraw their contributions from the Roth I.R.A whenever they want. However, they cannot withdraw the earnings (7-10% returns) until the account is at least five years old. However, this doesn’t apply if the holder is past the age of 59.5 years.
But Roth I.R.A is flexible regarding its withdrawal regulations. So, if you are trying to get money for educational expenses or a down payment for your first house, you might apply for an early withdrawal. Other than that, unnecessary early withdrawal is strongly discouraged because it disrupts the long-term tax-free compound growth.
The younger you start a Roth I.R.A, the better. Because then it gets enough time to grow into a large amount when the account holder reaches retirement age. For instance, if you start contributing an average amount every year before age 15, you can end up with a few million dollars when you reach age 70.