Luis Pazos 
The financial community often says Americans are not ready for retirement, mainly because many don’t save regularly. But there might be hope for your kids. A key to successful investing is to start early and let your money grow through compounding. You can help your children by opening a Roth IRA for them.
Imagine if your kids started investing before finishing high school. They could do that with a Roth IRA. This type of account allows you to invest your earned income, mainly for retirement, but it’s also useful for other purposes, especially for children.
As a parent, you should know that Roth IRAs offer tax-deferral on investment income, avoiding the “kiddie tax” on earnings. Contributions to a Roth IRA grow tax-free and can be withdrawn early without penalties, unlike traditional IRAs.
Here’s how it works: Add money from your earned income to the account, let it grow tax-deferred, and after age 59½, withdraw it without penalties. Roth IRAs differ mainly in that their contributions aren’t tax-deductible, but withdrawals are tax-free if held for five years. Roth IRAs also don’t require minimum distributions at age 73, unlike traditional IRAs. This flexibility is beneficial for kids, especially for education expenses.
Children can contribute to a Roth IRA up to their earned income, with a maximum annual limit of $7,000. They don’t need to hit the max—the goal is to start saving long-term. Contributions are limited to earned income, like wages reported on a W-2, part-time jobs, or even casual work like babysitting. If your business hires them, keep careful records to avoid IRS issues.
Kids can’t open Roth IRAs themselves, so a custodial account is needed, with you as the guardian. You control the account until they reach adulthood. You can also fund the account as long as it doesn’t exceed their earned income.
The benefits for kids are substantial. Starting early allows significant growth over time. For instance, $6,000 invested at age 25 grows to about $89,847 by 65 with a 7% return. But $3,000 invested at age 10 grows to about $123,945 by 65, showing the power of early investing. Kids could also use the funds for education without taxes on contributions or penalties, making it a flexible saving tool.
Other investment options for kids include 529 College Savings Plans, which are tax-advantaged for educational expenses, and custodial accounts like UGMA/UTMA, though without tax benefits.
If you’re interested, consider opening a Roth IRA at investment firms that offer favorable options. Some of the best include Betterment for hands-off investing, M1 Finance for self-directed portfolios, and Stash for low fees. Each offers different benefits, so choose what fits your needs best.
In conclusion, a Roth IRA is a fantastic way to start building a financial foundation for your kids, giving them a head start on major life expenses like education and their first home.
