The Benefits and Strategies of Starting a Roth IRA for Your Children
By, Jeremy Reif, CRPS
If you haven’t heard of a Roth IRA by now, you must be living under a rock. Let’s discuss a new twist to investing in Roth IRA. Knowing what you know now, do you wish that you had the ability to invest in a Roth IRA when you were younger? Getting a Roth IRA started for your children or grandchildren is a wonderful way to set them up for financial success in the future. The only problem is that children need earned income to make a contribution. While it’s important to consult with a financial advisor for personalized advice, here are a few creative ideas to consider:
Already in the Workforce:
Maybe your children or grandchildren are a little older and already in the workforce. If they already have a job receiving earned income, the simplest step would be to set up a Roth IRA and start making contributions. The letter of the law doesn’t say who can make the contribution. The idea is, instead of gifting money outright to the kids for birthdays or holidays, money could be directed to their Roth account. Please note to make sure that you talk to a CPA or Financial Advisor about contribution limits and earned income totals for the year.
For those children who do not have a job it might just take a little creativity:
(Please consult with your CPA about working ages and appropriate income)
Create a Family Business:
Start a small family business or side hustle that involves your children. Allocate a portion of the business income to their Roth IRAs. This not only teaches them valuable entrepreneurial skills but also allows them to contribute to their retirement savings.
Match Their Contributions:
A simple idea would be to treat this similar to how a 401(k) works with an employer. Encourage your children to save money from their allowances, gifts, or part-time jobs. Offer to match a percentage of their contributions to their Roth IRAs. This can provide an extra incentive for them to save and help them see the immediate benefit of contributing to retirement savings.
Gift Investments:
Traditional gifting is given to charity. How about gifting directly to family? Instead of giving traditional gifts for birthdays or holidays, consider gifting stocks, mutual funds, or ETFs that can be transferred directly into their Roth IRAs. This allows them to start building their investment portfolio early and take advantage of potential long-term growth.
Why use a Roth IRA? The Roth IRA can be a great option for your children’s financial future, as it offers several potential benefits. Here are some reasons why a Roth IRA might be a good idea:
Tax-Free Growth:
Contributions to a Roth IRA are made with after-tax money, meaning that the money invested has already been taxed. However, the earnings within the account grow tax-free, and qualified withdrawals in retirement are also tax-free. This can provide significant long-term tax advantages for your children.
Long-Term Compound Growth:
Starting a Roth IRA for your children at an early age allows more time for their investments to grow through the power of compounding. Over several decades, even small contributions can accumulate and potentially grow significantly.
Educational Opportunity:
Pick up the slack where we know our public education systems fail in personal finance. A Roth IRA can serve as an educational tool to teach your children about personal finance, investing, and retirement planning. Involving them in the process and helping them understand the importance of saving for the future can impart valuable financial lessons.
Financial Independence:
By starting a Roth IRA for your children, you’re giving them a head start in building their own financial independence. The funds in a Roth IRA can be used for various purposes, including education expenses, a first-time home purchase, or retirement income.
Flexibility:
Roth IRAs offer flexibility in terms of contributions and withdrawals. Your children can contribute up to the annual limit (subject to their earned income), and they can withdraw their contributions (but not earnings) penalty-free at any time. This flexibility can be useful if they have a financial need or want to use the funds for a specific purpose.
While a Roth IRA has its advantages, it’s important to consider your children’s individual circumstances and financial goals. Consulting with a financial advisor and CPA can provide personalized guidance based on your specific situation.