About Roth IRA
Roth IRA is near a traditional individual retirement account (IRA). The only difference is the way how they are taxed. A Roth IRA is an Individual Retirement Account, which isn’t taxed upon distribution, provided when certain conditions are met under United States law. With this type of retirement account, your earnings can grow tax-free, and also you can withdraw them tax-free as well after the age of 59½ with the requirement of a 5-year open account. Let us learn how to ‘Start A Roth IRA For Your Kid’?
Why Should You Start A Roth IRA For Your Kid?
In order to teach your kid how to save money and use a bank account, opening an account in a bank for your child is a smart move. Most banks or credit unions provide saving accounts, especially for children such as Capital One’s Kids Savings Account, or USAlliance Financial’s MyLife Savings for Kids. Roth IRA on the other normally doesn’t count as a child saving account. However, it is actually highly beneficial for children.
The first reason that comes to mind is Roth IRAs have no age restriction. Any child, regardless of their age, can own a Roth IRA account. Therefore, it is an excellent savings account for people of younger age and you don’t have to wait for receiving paychecks to open an individual retirement account.
Another possible purpose to start a Roth IRA for your kid is that it is a tax-advantageous savings vehicle. Because when you open a retirement account for your kid at such a young age, they will have a long time ahead of them and own this account for a long time. A retirement account for a child that has a low tax rate is the most sensible thing to do in a sense of taking advantage of time.
When your kid wants to withdraw their collected savings, their tax bracket will be lower than the time they put the money in as opposed to the other saving accounts.
Above all, it is a valuable lesson for your kid to learn about handling money, investing, and saving money. Hence, you might consider opening a retirement account for your offspring to let them have an early start in the financial world.
Also, a Roth IRA gives an opportunity that enables you and others to contribute to your kid’s account provided by Roth IRA. The contributions you make to the kids’ account can be a pleasant gift. One way to contribute to your child’s savings is by percentage. You can choose to make a 10% contribution when your child has $1000 and increase the amount to $1100. Another option to contribute to your kid’s Roth IRA is to deposit money up to the same amount of the money your child has earned and put into the account.
Last but not least is that the Roth IRA doesn’t charge a 10% penalty when you withdraw the money before the age of 59½ in contrast with other retirement accounts, which is a better deal for children.
How To Start A Roth IRA For Your Kid?
In order for your kid to be counted as eligible for a Roth IRA is that your child has earned a certain amount of income including formal employment income and self-employment income. These types of jobs can be mowing the grass, walking the neighbor’s dog, taking out the neighbor’s trash, and working as a waiter at a restaurant or a cafe in the summer or after school.
A second requirement is for parents or an adult who will be the custodian to help both open and manage the account. All you have to do is to provide a Social Security number for both you and your child along with some other personal pieces of information, which should not take not more than 15 minutes or so.
A custodial Roth IRA is supposed to be handled by an adult and holds the assets for the minor until the age of 18, or the age of majority depending on the laws of the state you are living in. After the majority age, the Roth IRA will be also transferred to their names. Until then, your child would be allowed to use or withdraw the money from his account only with the custodian’s approval.
How To Fund The Roth IRA Of Your Kid?
As we have established before, a child of any age can possess a Roth IRA. The only thing is the income that your child has earned has to be made out of work with an age-appropriate wage. This issue and knowing what money is actually earned is easy to figure out when your kid is working for a company because the companies are required to use the 1099 form to report non-employment income to the Internal Revenue Service. Nevertheless, this situation might get harder if your child is earning money from such jobs as babysitting or owning a lemonade stand. Therefore, it is particularly significant to keep correct records of the incomes and invoices for the work that is done.
Conclusion
Thanks to the tax-free growth opportunity that Roth IRA for Kids provides, children take advantage of this chance at such a young age, which they will appreciate later in their lives.
