We’d like to highlight an excellent opportunity for you to empower your child or grandchild to jump-start their savings journey and learn valuable financial skills. Encouraging them to consider a Roth IRA can be an intelligent move with long-term benefits.
Why Roth IRAs for Kids and Grandkids Matter
- Tax-Free Growth: Roth IRAs offer the potential for significant tax-free growth over decades, making them an attractive choice for younger savers.
- Summer Earnings: If your child or grandchild had a summer or part-time job generating earned income, they can open and contribute to a Roth IRA. In 2023, they can contribute the lesser of their earned income for the year, or $6,500.
- Custodial Accounts: If the child is a minor, you, as a parent or grandparent, can establish a Roth IRA as a custodial account. Once established, the funds become the child’s to control once they reach adulthood.
- Earned Income Sources: Roth contributions can come from various sources of earned income, including traditional W-2 wages or self-employment income (e.g., lawn mowing or babysitting). Ensure you document their earnings and file a tax return for the year of the contribution.
Key Points to Remember
- Roth IRA contributions can be withdrawn without harsh penalties for most withdrawals.
- A 10% penalty tax applies to Roth IRA earnings withdrawn within the first five years (unless an exception applies).
- The penalty on earnings can be avoided if used for purchasing a first home or paying for qualified education expenses.
- Roth IRA withdrawals are treated as coming first from the contributions, which are not subject to penalties or taxes.
Starting a Roth IRA for your child or grandchild can be a valuable lesson in saving for the future. If you’re interested in exploring this option further or have any questions, please don’t hesitate to contact us. We’re here to assist you in securing a brighter financial future for the young ones in your life.
