4 Benefits of Opening a Roth IRA for Your Children


Opening a Roth IRA (Individual Retirement Account) for a child is usually not on a priority list, but it is something to consider if you want to give your child a boost.

Any adult can open an account for a child and contribute after tax if the child has earned income from employment or other work. The real benefits start to show when you invest the contributions in assets that can expand your child’s wallet over time. All contributions made during your child’s lifetime may constitute a tax-exempt windfall upon retirement.

If it seems too premature to open a retirement account for your child right now, here are four Roth IRA benefits that might change your mind.

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1. It can turn into an emergency fund

Most parents want to put their kids in a position to never have to worry about money. The Roth IRA makes it easy to eliminate money problems by allowing savers to dip into contributions at any time. If you contribute a total of $ 25,000 over a five-year period to your child’s Roth IRA, you can still dip into your account and get the money you contributed back as long as they are legitimate expenses for the benefit. of your child. You will not be subject to taxes or penalties when you withdraw your contributions.

While the flexibility of the Roth IRA may appeal to you, you should think twice before using it. Once you have withdrawn the money, you will not be able to go back to your account and replace the funds. Each year, the IRS places a limit on the amount of money you can contribute to your retirement accounts. For 2021, a person under the age of 50 can contribute up to $ 6,000.

Hitting your Roth IRA funds might reduce the pot of money that can grow in your tax-free account, but you have the peace of mind knowing that the money you contribute is not locked in forever.

2. It can become a source of funding for college expenses

There is a little-known benefit in the tax code that allows savers to use their Roth IRAs to pay for eligible education expenses even if you go above and beyond your initial contributions. You will avoid the 10% early withdrawal penalty, but you will still have to pay the income taxes associated with the winnings portion of your withdrawal. For some, this may be a better option than going into debt. To maximize this Roth IRA benefit, make sure you understand what counts as a qualified education expense and consider the impact on financial aid and your total assets.

Essentially, your Roth IRA can serve as a college savings fund if you use it strategically. If your child decides not to pursue higher education, the funds can just do what they were meant to do: create a nest egg for retirement.

3. It can be used as a down payment on your child’s first house

If you regularly contribute to your child’s Roth IRA, a bonus will be waiting for you later: the ability to use the funds for your child’s dream home.

There is a Roth IRA exemption that allows you to withdraw up to $ 10,000 to build or buy a new home. Your child will not trigger any taxes or penalties as long as you follow the rules. Remember: you can always withdraw contributions. The $ 10,000 Home Buyers Exemption is something more you can add to your down payment. Let’s say you’ve contributed $ 40,000 to your child’s Roth IRA in the past 10 years. You can withdraw the entire $ 40,000 plus the homebuyer’s exemption amount of $ 10,000.

4. It can help your child become a millionaire

While the Roth IRA offers many benefits that your child can enjoy before retirement, there is nothing quite like leaving all the money in the account and letting time take over.

Let’s say your offspring earns money as a model child. You decide to open a Roth IRA for your child at age 13, and the account is consistently funded with $ 6,000 each year. Children (or their parents) can contribute to a Roth IRA as long as the child has legitimate income and as long as the total income does not exceed the limits. Because time and compound growth present an incredible union, with only an annualized rate of return of 7% and no withdrawals, your children’s tax-free nest egg could be worth over $ 1 million before they reach. 55 years.

While waiting to withdraw the money until the age of 59 and a half, your child will be able to keep every penny of that million dollar Roth IRA fortune tax-sheltered.

Give your child access to opportunities

A Roth IRA may not be the most popular vehicle for financial success, but there is one definite benefit your child will gain: the ability to leverage the Roth IRA during every phase of life.

The Roth IRA can be your child’s companion during the college process, homeownership, and emergencies. The best part is that it only takes a contribution of less than $ 25 a day to put your child on the path to a lifetime of rewards.

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