With a custodial Roth IRA, you can help your child start saving for retirement as soon as they start earning income. Because Roth IRA contributions are made with after-tax money and can be withdrawn at any time, these accounts are a great option for your child to be financially successful in the long term. Investing in a custodial Roth IRA allows my children to access their money at the legal age, for example, to pay for school. The IRS exempts you from the 10% tax penalty for withdrawing your money before retirement age, with some exceptions, one of which is for higher education.
Any of these qualified expenses can be used to pay for a student's tuition, fees, books, supplies, and equipment. To begin with, a Roth IRA is a special retirement account that allows participants to receive tax-free income during retirement. There are no age restrictions, so a child can have a Roth IRA account and get a big advantage in both their retirement savings and their wealth-building goals. If the custodial IRA is a Roth IRA, the account owner can withdraw funds without penalty, unlike traditional IRAs.
However, if possible, the best thing is for the funds to remain in place and continue to benefit from investing early for the child's retirement many years to come. For many parents, a Roth IRA is somewhere between handing over cash and leaving their savings in place to grow tax-free. Minor children usually can't open a brokerage account on their own, but you can set up a custodial Roth IRA for them to save for college, retirement, or other potential expenses. In most cases, you'll want an investment account for your Roth IRA for children, not just a simple interest-bearing bank account.
When a child reaches adulthood in their state, usually 18 or 21 years old, the Roth IRA with full custody is transferred to him. It may be a tough sell for kids compared to spending the money they've earned (or saving it for college, something that will happen long before retirement), but an IRA that opens soon can create a lot of financial security later on. For example, a Roth IRA allows the account owner to withdraw 100% of what they have contributed at any time and for any reason, without taxes or penalties. In fact, your child can earn money with a summer job, but you match your income as contributions to your Roth IRA for children.
If your child earns less than this amount, they're likely to fall into a 0% income tax bracket and probably won't benefit from the initial tax deduction associated with traditional IRAs. While a Roth IRA is technically a retirement account, the money you contribute doesn't have to stay there forever. Once the custodial IRA is opened, the custodian manages all the assets until the child turns 18 (or 21 in some states). A child, nor any parent, guardian, or loved one can contribute to a Roth IRA for children if the account owner has no earned income.
A Roth IRA is more flexible than other retirement accounts because contributions can be withdrawn at any time. Since Roth IRAs can be invested in almost any type of asset, they are likely to perform much better than a savings bond or an old bank account. In general, the Roth IRA is the preferred IRA for children who now have limited incomes, as it is recommended for those who are likely to be in a higher tax bracket in the future. Establishing a Roth IRA for children allows the children in your life to start taking advantage of the opportunity to grow up tax-free at an early age.