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6 Reasons Your Kids Should Have a Roth IRA

By September 23, 2018 No Comments

Pop quiz…

When it comes to raising your kids, which of the following doesn’t belong?

  1. Considering a solo trip to the grocery store as “me time”
  2. Identifying the cause of this week’s mystery smell emanating from their rooms
  3. Looking at their math homework and realizing they may be smarter than you
  4. Opening their Roth IRAs

Actually, that was a trick question. Turns out, they all belong, and for good reason.

Depositing all or a portion of the money your kids have earned mowing lawns, selling lemonade or babysitting into a traditional savings account is good and fine, but diverting those same dollars to a Custodial Roth IRA could be the difference between teaching them to save AND teaching them to invest….a small difference now than can make a very big difference later.

One more pop quiz.

Which amount is more likely to aid in a comfortable retirement and /or wealth transfer across generations:

  1. $200,000
  2. $10,000

If you chose A, you should keep reading.  If you chose B, you should choose A.

Consider this: A one-time investment of $5,500 in your child’s Roth IRA today could very well turn into $200,000 of tax-free cash in 60 years based on historical average market returns.  By comparison, there are few, if any scenarios where that same amount stashed in a traditional savings account could reach even $10,000 in that time.*  Sure, 60 years is a long way off, but it’s the work done today that can ensure fond memories of dear-old-financially-gifted mom and dad carry well into the next generation.

On that note, let’s dive a bit deeper…

What Exactly Is a Roth IRA for Kids?

The short answer: it’s….exactly that.

The slightly longer answer: a Custodial IRA is a retirement investment account opened by an adult in a child’s name. For the most part, it works like a traditional Roth IRA in that contributions are allowed to grow and are distributed tax-free.  But there are a few added benefits baked in specifically for minors (more on those in a few).

Yes, Little Timmy Likely Qualifies

In order to qualify, your child must simply have earned income (money earned from paid work). There’s no minimum age requirement, and contributions are limited to the lesser of total earned income for the year and the current maximum allowed by law of $5,500.  And in the very likely event that your kids would rather buy video games or stuffed animals than contribute to a retirement account, you can choose to make full or partial contributions on their behalf.

The Benefits Are Many. Here’s 6 of Them.

  1. Right off the bat, you’re teaching your child how to save AND invest Even if they’re only investing $25 per month, good habits are being formed. Stay the course with them and…
  2. Compound interest will do magical compound interest things (remember that $5,500 turning into $200,000?). Getting kids started early with their retirement allows them to take advantage of one of their most valuable assets – time, ensuring their money can grow for decades longer than that of their adult counterparts.
  3. Also worth repeating is the fact that your kid generally won’t owe taxes on the money when they withdraw it, no matter how much they’ve earned in the account over the years and can withdraw contributions at any time without penalty unlike most other retirement accounts.
  4. When the time comes to start thinking about college tuition, your child can access funds from their IRA for qualified college expenses, penalty-free.
  5. As for that first home, they’ll be able to access up to $10,000 to go towards a down payment. Again, penalty-free.
  6. And perhaps the most important benefits of all?  Financial security and potential early retirement…. if they play their cards right that is. (That’s your cue to make sure they play their cards right.)

Does a Custodial Roth IRA Fit Into Your Plan?

To be sure, Custodial Roth IRAs are one of many (but too often overlooked) options to help get your kids started off on the right financial footing. And there are risks. As with any investment, it’s possible to lose money.  However, history suggests the odds are in your favor assuming a diversified portfolio growing tax free over a period of decades.

I can help you determine whether a Custodial Roth IRA is the right move for your family.  And if so, show you how setting it up can be surprisingly simple.  Email me at jeff.pierce@berkeleycp.com or better yet, give me a call at 678.690.8712.

Jeff Pierce

Berkeley Capital Partners

* Methodology: One-time contribution of $5,500, compounded over a 60 – year period. Includes 6.2% average annual investment return and monthly compounding; not adjusted for inflation. 

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