How to Start a Roth IRA for kids
A Roth IRA is a great way for kids to start saving for their future. Here's how to set one up and get started.
What is a Roth IRA?
Roth IRA is an account that allows you to save money for retirement without having to pay taxes on the contribution until you withdraw the money in retirement. When you make a contribution to a Roth IRA, you are essentially investing money that you will not have to pay taxes on when you withdraw the money at retirement.
A Roth IRA is a great way for kids to start saving for their future. Contributions can be made from as young as age 18, and earnings on contributions are tax-free if used for retirement. Plus, there are no required distributions when you reach retirement age, so your money will stay invested and grow tax-free.
How to Open a Roth IRA for Kids
Starting a Roth IRA for kids is simple. You first need to figure out your child's modified adjusted gross income (MAGI). Then, you can open a Roth IRA account on their behalf.
Your child's MAGI will be the same as their own, minus any amounts they have contributed to a traditional IRA or 401(k) plan. You can also contribute up to $5,500 per year to a Roth IRA on your child's behalf.
To open a Roth IRA for your child, visit ira.gov and follow the prompts. You'll need your child's social security number and date of birth. Once you've completed the online form, your account will be opened and you'll receive an account login information letter in the mail.
What Investments to make in a Roth IRA for Kids
When you are thinking about what investments to make in a Roth IRA for your kids, it is important to consider their age, risk tolerance and investment goals.
Here are some recommendations for making Roth IRA investments for kids:
1. Consider investing in stocks if your child is between the ages of 8 and 18. While there is more risk associated with stocks, they also offer the potential for higher returns.
2. Investing in mutual funds or exchange-traded funds (ETFs) can be a good option for younger investors. These vehicles typically have lower costs and offer diversification across a number of different asset types.
3. Consider options like 401(k)s or 403(b)s when children reach college age. These plans offer employees a tax-advantaged way to save for retirement, and they can be supplemented with Roth IRA contributions as well.
Why Invest in a Roth IRA for Kids?
A Roth IRA is a great way to save for your kids’ future. Here are five reasons why you should open a Roth IRA for your kids:
1. A Roth IRA is tax-free when you make contributions. This means that the money you save goes into your account free of taxes.
2. You can contribute up to $5,500 per year per child, which is more than you can contribute to most other types of accounts.
3. You can withdraw money from your Roth IRA without penalty at any time without having to pay taxes on the withdrawal.
4. When your child turns 18, he or she can begin withdrawing money from the account without penalty and start paying taxes on the withdrawals. (The IRS allows young adults to start taking out money from their Roth IRAs starting at age 20 if they have earned income.)
5. If something happens and your child doesn’t have enough money saved in a Roth IRA to cover his or her required minimum distributions (RMDs), the government will help cover those RMDs on a case-by-case basis. This is known as the “k
Conclusion
If you are looking to start your child or teenager on the road to financial independence, a Roth IRA might be the right choice for you. A Roth IRA allows you to contribute money tax-free, which means that your investment will grow over time without any penalties or fees. If you're not sure whether a Roth IRA is right for your family, talk to an expert financial adviser who can help you figure out the best way to save for your children's future.