In general, people want to have a comfortable life when they retire. Preparation is been made by saving money as early as possible for the retirement fund. This is how IRA plays a role. An Individual Retirement Account (IRA) is a type of savings account that is designed to help you save for retirement and offers many tax advantages. There are two different types of IRAs, Traditional and Roth IRAs.
The principal difference between a Traditional IRA and Roth IRA is the type of tax benefit each offers. With a Roth IRA, you get no deduction for contributions, but if you follow all the rules your investment earnings will be distributed tax- and penalty-free in retirement. Traditional IRAs can provide a deduction for contributions and you suspend taxes on investment earnings until funds are withdrawn, typically in retirement.
For saving retirement for the kids, it falls under the Roth IRA. And yes, any parent can open a Roth IRA for their kid. A handful of brokerages now offers Roth IRAs for kids. Adults, usually a parent or grandparent, control them, but the account is opened in a child’s name. When she/he becomes an adult, she/he assumes control of the account. It seems a long time off, but it can provide your child with a great start on retirement accounts and educate them the value of saving. In addition, under certain circumstances, you can utilize the money to buy a house, or to fund educational expenses, or in an emergency.
If you open a Roth IRA for a child, the money has a longer time to grow or compounding. That can make a big distinction. For example, if you make a single, one-time contribution to a child’s Roth IRA when they are 15, that will turn into more than $160,000 tax-free when they are 65 (assuming a 7% annual return). If they waited until they were 35 to contribute to a Roth, they would need to save $22,000 to reach that same amount. Unlike a traditional IRA, contributions to a Roth do not earn a tax deduction, but the account’s earnings will compound tax-deferred and be available for tax-free withdrawals when your child retires in. By taking benefit of a popular savings vehicle known as the Roth IRA as early as possible, you could set your child up for a rich retirement.
How to start the Roth IRA for your kids? First, is opening Roth IRA account from your trusted brokerages. Since children will not have any salary what you need to do is hire her/him at home within the family business (self-employed), as a file clerk or marketing assistant, for instance. In this scenario, you can benefit twofold by receiving a deduction from business income, and you can make a contribution to your child’s retirement. If you are not self-employed, you can still hire your child and pay them via W-2 or 1099-MISC income for cleaning the house or doing other odd jobs around the house – just make sure you document everything carefully and put the pay directly into the Roth IRA. Since the child is working for the parents at home, no child labor laws are in violation.
Once your child starts gainful employment outside of the home or summer work between school breaks, you can still gift an amount equal to the Roth IRA contribution to the child and deposit this amount into a Roth account for them just as long as their compensation is equal to or greater than the gift. Some parents make contributions totheir daughter’s/son’s Roth IRA as a reward or match for the money earned in a summer job or over the year.
It is hard for some kids to save money that they have earned when they would rather be spending it on games, movies or clothes. Having a Roth IRA for your kids, it offers a chance to reinforce the value of earning money, and show kids that you value saving for the future. It is really about teaching them about saving for the long-haul. This is an excellent chance to teach the kids about finance, stocks, mutual funds and the basics of investing.